We will know soon enough whether the political optimism is justified – whether the Mauricio Macri administration will receive the kind of mandate permitting it to live up more to its promarket image and make the Argentine economy more competitive.
The annual IDEA business symposium in Mar Del Plata (almost always strategically timed for just prior to the day of decision in electoral years) exuded an optimism bordering on euphoria, at all odds with the grim weather reigning in that Atlantic resort, and nor was there any lack of both political and economic grounds for that upbeat mood. Nevertheless, the alarmingly high 1.9 percent September inflation figure announced by INDEC national statistics bureau in the middle of the joyous huddle should give bullish businessmen pause.
From at least one standpoint this figure also contributes to feeding the great expectations of businessmen – it indicates the more robust demand of a growing economy capable of absorbing these higher prices. And the dubious premise that a bit of inflation is the price of growth has long been chronic in Argentine thinking, all the more so in the last decade. But that recent growth could also be jeopardised because this latest inflation figure will oblige the Central Bank to maintain its potentially recessive policy of high interest rates.
Yet in a longer term this inflation is cause for concern. Firstly, it reverses a positive trend which had fed illusions that inflation could be tamed – fter dipping to a monthly 1.5 percent in August from the 1.8 percent of the previous month, we now see last month’s inflation accelerating beyond the July level. Secondly, this drives a coach and horses through Central Bank forecasts – in just three quarters of the year the maximum permitted inflation figure of 17 percent has already been exceeded to reach 17.6 percent, thus undermining credibility for next year’s guidelines (a range between eight and 12 percent).
The third (and perhaps most serious) factor is the persistence of core inflation, which prevents this adverse figure from being dismissed as a seasonal blip. If the government could attribute much of last year’s 41-percent rate of inflation to the steep increases in household utility bills, updating a decade of populist pricing, this has been far less of a factor this year with many increases in the pipeline awaiting the post-electoral months. But core inflation (i.e. the measurement of the most basic expenses such as food, weeding out all seasonal and extraordinary factors) has stubbornly remained above 1.5 percent since February, thus defying the Central Bank’s 17-percent forecast all year.
Last, and perhaps not least, is a factor highly unlikely to influence the outcome of next weekend’s voting but which could breed trouble in the future – the high number of collective bargaining agreements containing a clause to trigger a new round to negotiate a further wage increase, in the event of inflation exceeding the official forecasts (a clause pioneered by the extremely numerous Buenos Aires provincial employees). Industrial relations could thus be complicated precisely at a time when the government is contemplating major labour reforms.
Yet neither all this nor the bleak weather could cloud the bright mood in Mar del Plata – a survey of those present showed 86 percent are expecting growth, higher investment and job creation in the next year. We will know soon enough whether the political optimism is justified – whether the Mauricio Macri administration will receive the kind of mandate permitting it to live up more to its promarket image and make the Argentine economy more competitive. But in the light of this nagging inflation (as well as a bulging fiscal deficit where Macri has yet to bite the bullet and also an alarmingly adverse balance of trade about which hardly anybody talks) the economic optimism stands to be tested over a much longer haul.