The government recently became convinced that the economy was entering a recession based on three key factors. These included a reduction in the deficit, signs of a decrease in inflation, and a collapse of private credit. These indicators began to reflect the impact that the shock plan had on consumption, activity, and investment at the beginning of the year.
The Minister of Economy, Luis Caputo, originally predicted that when it was reported that inflation was 30% in December, 30% in January, and then 20% in February, people would not accept such an increase. However, it seems that they are doing so. The initial shock plan resulted in a big jump in prices and a strong fiscal adjustment, leading prices to begin to decline. Caputo originally expected a 40% inflation in the first quarter but ended up being much higher at 65.5%.
The Central Bank revealed that there was a significant collapse in peso loans to the private sector due to factors such as accelerating inflation and policy negative rates that led to reduced fixed term lending by banks. Javier Milei, Minister of Economics during his inauguration speech mentioned challenging times were ahead but hoped for improvement. However, recent data showed otherwise with a 5% year-on-year fall in economic activity in December alone. Additionally, there were significant drops in construction and automotive production along with layoffs and suspensions due to diminished sales and commercial debts.
Different sectors like tire industry and investment also presented negative trends with considerable declines in activity reflecting deepening economic downturn. Economists consulted by the Central Bank expect an economic contraction of 3%, accompanied by an increase in unemployment rates.
The concern remains whether the government will be able to lower inflation with another devaluation potentially further accelerating prices if they cannot reduce their deficit levels.
In conclusion, despite government efforts to stabilize the economy through fiscal adjustments and monetary policy interventions like reducing interest rates or implementing negative rates for certain periods of time