Why is anybody even talking about judicial reform, when it has just been officially confirmed that the economy plunged 12.9 percent in the first half of this year? If the Frente de Todos administration called the inherited 2019 negative growth of -2.1 percent “scorched earth,” what description does this collapse warrant? The coronavirus pandemic is, of course, the perfect alibi and while it does indeed explain a lot, there remains the nagging doubt that it does not explain everything – such curiosities as rapidly dwindling Central Bank reserves amid a bulging trade surplus, for example.
Even restricting the analysis to pandemic fallout still raises such questions as why the economic collapse is twice as steep here as in neighbouring Brazil or Chile – countries where the human cost of Covid-19 is far higher with both more than trebling Argentina in terms of death toll relative to population size. It could then be argued that it is no coincidence that economic decline and coronavirus deaths are in inverse proportion among these ABC countries, a tribute to the efficacy of Argentina’s more intense lockdown as a deliberate choice. Plenty of truth in this argument but in that case also bad news for the economy because the partial recovery from the -26 percent plunge posted in April is largely due to the resumption of economic activity in most provinces since May and it is precisely inland that the pandemic has been spreading fast this month – the 95 percent virtual monopoly of coronavirus cases once held by the AMBA Buenos Aires metropolitan area is now down to 75 to 80 percent with Misiones the only province spared any Covid-19 infection on Thursday.
While there is thus no guarantee for the continuity of the partial recovery with the prospect of new lockdowns lurking, any pick-up also faces a brick wall when it comes to demand. Although some sectors suffered much worse than others (hotels and restaurants plunging 62.7 percent and construction almost 42 percent, according to the INDEC national statistics bureau’s figures for the first half of the year), the damage was almost across the board with even agriculture dipping 9.6 percent. Consumer demand is already unsustainable with almost 300,000 less wages but to recession must be added an inflation still in the pipeline – even with inflation only latent, a family needs a monthly 44,521 pesos to stay above the poverty line and 18,321 to escape destitution, INDEC also reported on Thursday, thus making the IFE emergency family benefit of 10,000 pesos look somewhat inadequate.
Paradoxically enough, this potential inflation is partly the result of the main economic success story of the trade surplus. Why? Because recession and the dollar shortage have so crimped imports (the root cause of the surplus rather than any export surge) that many companies are resorting to parallel exchange rates to buy abroad the inputs without which they cannot stay in business. This is seeping into wholesale inflation, explaining why last month’s core inflation of 2.5 percent could be so much higher than the July figure of 1.9 percent, even though the “food and beverages” item normally at the heart of core inflation only weighed in at 1.3 percent – cost-push inflation thus lies in the offing.
If the commercial availability of dollars at the official exchange rate is so limited, this stems from the gap between that exchange rate and its alternatives running at around 80 percent – logical enough given the huge imbalance between the three trillion pesos likely to be printed this year against the enormous strain for the Central Bank when letting go of even US$200 per citizen.
No lack of slack in industry to sustain recovery but idle capacity faces both supply and demand constraints with both imports and consumer markets so uncertain. Putting the economy back on track evidently requires more than successful debt negotiations.
Finally, a word on the likely political fallout from the pandemic’s economic havoc. At first sight prospects are bleak for the ruling coalition because governments historically find it hard to escape blame for disasters even not of their making – thus in 2011 Cristina Fernández de Kirchner was almost the first leader of a major country in the world (beyond India) to win re-election in the three years following the 2008 global subprime crisis. But on the other hand, when measured against this year’s collapse the growth figures around midterm election time next year are sure to be strongly (if artificially) positive. Yet all future speculation is idle – the focus must be the pandemic now.