ECONOMY-ARGENTINA: Hitting Bottom - to Stagnate, or Rise Again?

• by Marcela Valente (buenos aires)
• Thursday, July 23, 2009
• Inter Press Service

'Farming and industry had a very bad first quarter and are now recovering. But we'll have to wait and see what impact the H1N1 influenza (swine flu) epidemic has on consumption,' economist Dante Cica of the Abeceb consulting firm told IPS.

That will determine whether the economy 'plateaus or recovers,' he said.

The H1N1 flu epidemic that has affected at least 120,000 people in this country, more than 150 of whom have died, has led to a slowdown in economic activity. Theatres, cinemas, discos and gyms were temporarily closed, school vacations were extended and fewer people have been going out to eat.

The Argentine economy grew at an annual average of eight percent between late 2002 and 2008 - the longest period of GDP growth in the last century. However, the global financial crisis and local problems put a stop to this record expansion.

In 2008, GDP growth was seven percent, and the government considers that four percent growth this year would be an excellent result. But although this figure is wishful thinking and will not be achieved even in the best-case scenario, it was mentioned by Interior Minister Florencio Randazzo and the executive branch used it for its budget calculations.

Off the record, government officials admit that economic growth will be below two percent this year.

The latest economic survey by the Economic Commission for Latin America and the Caribbean (ECLAC), released mid-July, projects 1.5 percent growth for Argentina this year, which would be a relatively good showing given that the regional economy is expected to shrink by 1.9 percent.

Abeceb's forecast is less optimistic. In the most favourable circumstances, if the economy begins to recover, Argentina will have a negative growth rate of about minus 0.5 percent in 2009, it says.

But if economic activity stagnates and the recession bites deeper because of the flu epidemic, the economy could shrink by minus two percent, Abeceb says.

The generally accepted definition of a recession is at least two consecutive quarters with GDP growth lower than the equivalent quarters of the previous year. But in Cica's view, in Argentina, where half a million new cars a year are still being sold, recession cannot be defined in this way.

Another economist with ties to the world of finance, who wished to remain anonymous, told IPS that the global economy 'hit bottom' and began to recover in the second quarter of 2009. 'Argentina will benefit from improved international prices for agricultural commodities,' he said.

Argentina will also have better access to world markets for other products like steel, aluminium and leather, the expert said.

'All else being equal, next year should be better for Argentina than this, because of the recovery of international prices and bigger harvests,' he predicted.

'Just as Argentina benefited from the extraordinary performance of the global economy from 2002 to 2007, this year we have lost out because of a combination of three factors: low commodity prices, drought, and lack of access to credit markets,' he said. Early in the global crisis, prices plummeted for key Argentine export products like grains and oilseeds. Now prices are rallying, although not to the same levels they attained before the collapse.

In addition, the worst drought in a century caused this year's harvest to plunge from 96 to 62 million tonnes.

The loss of agricultural production hurt tax revenue, which in turn jeopardised the government budget surplus.

Since 2003 Argentina's government accounts have been in the black, but between January and May 2009 the budget surplus fell by 65 percent compared to the same period in 2008, excluding debt servicing payments.

If debt payments are included, the administration, for the first time in six years, has a deficit of some 25 million dollars. According to analysts, the deficit could increase by year-end, making recovery even more difficult.

The trade balance is another problem. At present there is a positive trade balance because the government of President Cristina Fernández has implemented measures to reduce imports.

The expert speaking on condition of anonymity said that, in the current context, spending by the administration has increased excessively. For instance, the government chose to subsidise part of the salaries of over 70,000 private sector workers in order to avoid layoffs.

Even so, unemployment is rising, reversing the trend that has prevailed since 2002.

According to the National Statistics and Census Institute (INDEC), which has lost credibility since it was subjected to government intervention in 2007, unemployment stood at 8.4 percent in the first quarter of 2009, up from 7.3 percent in the last quarter of 2008.

The Catholic University of Argentina's Observatory on Social Debt estimated unemployment in June at 11.8 percent. The INDEC has not yet reported its results for the second quarter of the year.

© Inter Press Service (2009) — All Rights ReservedOriginal source: Inter Press Service

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