After a decade of growth, the Argentine government faces this year a decline as industrial output falls and a high inflation rates hits consumer spending and new investment. The Argentine economy grew steadily recovering from a 2001-2003 debt crisis and expanded 3% last year but it stumbled in the fourth quarter and could slid into a recession at the start of this year.
Industrial activity dropped 4.2% in April compared to the same month last year, according to the government’s Indec stats office. The decline was largely due to a 20% fall in auto manufacturing as more than 15,000 workers have been suspended due to lower sales on the domestic market and fewer exports to Brazil, the main buyer of Argentina’s production.
A devaluation of the peso currency and a hike in interest rates in January weakened consumer spending, a pillar of the economy that had helped it withstand external shocks like the 2009 financial crisis.
The consensus view now is that the economy will shrink around one percent, the first full-year contraction since the debt crisis, when Argentina defaulted on 100 billion sovereign debt.
Output contracted 4.4% in 2001 and a stunning 10.9% the following year but since then has grown at an average of 6.2% a year.
The shift in policies in January was aimed at restoring the economy to better health in the medium term. But it’s causing pain now and critics say it may also fail because the government has not cut its own spending.
The 20% devaluation, the biggest in a decade, stoked inflation as people, who often think in dollars because they lack faith in their own currency, raised prices to adjust to the new exchange rate.
It also made the cost in pesos of imported goods and big-ticket items like houses that are sold in dollars jump. Opposition economists see inflation hitting at least 30% this year.
Salaries are not keeping up so real wages fell at one of the fastest clips since 2002 in the first quarter, think tank Ecolatina said.
Attempts to tame prices and shore up dollar reserves, such as a hike in interest rates and cut in energy subsidies, are also weighing on consumers.
“The measures have cooled consumption, which was the motor of economic growth for the last seven years,” Ecolatina said in a research note. “We do not expect consumption to grow in 2014.”