MercoPress. South Atlantic News Agency

Argentina's economy continues to shrink, but some analysts see recovery imminent

Around 1,700,000 Argentines have fallen off the middle class category

Argentina's Gross Domestic Product (GDP) has fallen 0.7% so far in 2021, which in addition to declines in 2018, 2019 and 2020, has led the country's economy to historic lows.

According to recent data, May recorded a 2% contraction compared to April levels. But analysts believe the situation has reached its floor and a rebound will come by shortly, boosted by an increase in the rate of anticoronavirus vaccinations.

However and for the time being, instead of recovering what was lost during 2020, the economic contraction which began in 2018 under then President Mauricio Macri is still dominant with the second wave of covid-19 infections and the ensuing restrictions as the main explanation.

Argentina's National Institute of Statistics and Census (Indec) reported a 2% drop compared to April and it was the second consecutive decrease, in line with the anti-contagion measures and their impact on production and consumption.

A report by the consulting firm PxQ released this week has underlined that “the sectors on both the supply side and the demand side were affected, but it is the latter that took the worst part. Retail sales surveyed by CAME fell 27% in May 2021 counting May 2019, the greatest distance from the pre-pandemic levels that the indicator had since the first wave.”

Data published by Indec regarding May's yoy comparison has little value since it compares current figures with those from the lowest points in history at the end of the first coronavirus. Hence, speaking of a 13.6% improvement means very little.

June's mobility data from the Google Mobility Report show that consumption may have started to bounce back and in light of the advances in vaccination, the second semester is expected to show some form of recovery, at least until after the elections, when new adjustments will be required regarding the Argentine peso's exchange rate.

The consulting firm Ecolatina has pointed out that May-June 2021 must have been the floor of the activity level of 2021 and demand and production were expected to recover starting in July, as wages begin to narrow their gap from inflation.

A study from researchers ACM has said that “looking ahead to the next few months, we expect May to be the bottom in the restart of the decline in activity associated with the second wave. Unlike the first wave, we hope that the recovery will be less heterogeneous as a result of the greater degree of certainty that comes with the vaccination campaign”.

ACM's findings match those of PxQ: “In June, with the decrease in cases and progress in the vaccination campaign, mobility recovered, the first data of the month [of July] suggest that this led to an improvement in activity, although the heterogeneous pace before the second wave seems to be holding.”

In any case, May's economic activity was below that of December 2020, with the downward trend already noticeable by April.

Ecolatina projections foresee an improvement of close to 7% by the end of the year 2021, which matches the government's calculations, while the Central Bank's Market Expectations Survey (REM) sets it at 6.4%.

Nevertheless, Argentine Institute for Fiscal Analysis (Iaraf) Director Nadin Argañaraz explained the current situation is far worse than in 2019 is very negative: “In the same month of 2020, economic activity was already affected by the pandemic and the restrictive measures applied. For this reason, it is also appropriate to compare with May 2019. The EMAE for May is 9.1% below 2019 and 13.6% above 2020,” Argañaraz pointed out.

”Of the five activities considered, it can be seen that the most affected after two years is Hotels and Restaurants (57% below 2019 and 54.3% above 2020) followed by Construction (23.9% below 2019 and 52.1% higher than 2020). Commerce and the Manufacturing Industry is 3% below the same month of 2019,“ he added

On the other hand, Economy Ministry analysts celebrated the YoY improvement in May and also highlighted that, in the first five months of the year, activity exceeded the first five months of 2020: ”Activity The economy grew 13.6% year-on-year. 14 of the 15 sectors surveyed grew. So far this year, the activity accumulates a rise of 9.5% year-on-year, despite the monthly variation in May of -2%. in other service activities, [such as] hotels, restaurants and construction ”.

But Argentina continues to be among the countries in the region to receive the least Foreign Direct Investment (FDI) in proportion to its GDP, scoring just 1.1 per cent, according to United Nations figures, which matches the country's performance with that of Ecuador, while Peru, one of the countries hardest hit by the pandemic, saw its FDI fall from 3.5% of GDP to 0.5% of GDP.

Every country in the region, except Uruguay and Ecuador, has recorded a fall in the FDIs received during 2020: Chile (from 4.5% to 3,3%), Colombia (from 4.4% to 2.8%), Brazil (from 3.5% to 1.7%), Argentina from 1.5% to 1.1% of GDP. While Argentina's drop is smaller than that of other nations, it is also true that it came from a lower base. In other words, Argentina has very little left to lose in terms of FDIs, regardless of the existence of a pandemic.

Argentina's poor competitiveness accounts for these figures, by scaring away potential investments instead of luring them. And competitiveness does not hinge solely on the exchange rate. There are many other factors at play such as tax pressure, public spending, labour litigations, bureaucracy and corruption, among others.

For FDI to grow again in Argentina, it is necessary to regain competitiveness, according to analysts. Argentina has been stagnant since 2011 and needs to discuss in a mature way how to carry out the structural reforms.

A recent World Bank report compiled with Indec data has revealed that nearly 2 million Argentines stopped belonging to the middle-class last year. From the around 14,700,000 middle-class people in the country, 1,700,000 have fallen off that category; from 51% of the population to 45%.