With inflation greater than 45% and a fall in GDP greater than 2.5%, along with a loss of purchasing power in salaries of 11%, and now who can help us? Will it be Brazil?

By Hernán Murúa

The decline in economic activity, which began with the megadevaluation of the peso, coincided with a peak in inflation, which reached a maximum of 6.5 percent in September. Meanwhile, in October, prices “only” grew by 5.4 percent, highlights the latest report from the Center for the Study of the New Economy.
In parallel, the Monthly Estimator of Economic Activity showed a negative variation of 6.7 percent in June, in the interannual comparison; 2.7 percent in July; 1.6 percent in August, and 5.8 percent in September. "With this, two consecutive quarters of decline were completed, which defines the recession. Therefore, the Argentine economy is in the presence of the worst of all possible worlds: recession plus inflation, which is known as stagflation," says Víctor Beker, director of said center.
For more information, the figures known in October indicate a decrease of 9.4 percent in retail sales of small and medium-sized businesses, according to information from the chamber that groups them. The Association of Automotive Manufacturers, meanwhile, had already reported a drop in vehicle production of 20.6 percent in September, compared to the same month in 2017, and 11.8 percent in October, while sales of new cars registered a drop of 46 percent in November.
The INDEC reported a drop of 11.5 percent in manufacturing activity in September, while the synthetic indicator of construction activity fell 4.2 percent, always in comparison with the same month of the previous year. Sales in supermarkets were lower by 7.9% percent.
"Most forecasts agree that annual retail inflation will be higher than 45 percent and that GDP will fall by at least 2.5 percent. Stagflation is a rare phenomenon. Normally, price increases are expected to accompany economic expansion processes and that, in recessionary periods, prices will calm down or even decline. However, in countries with high inflation, it is possible that it persists even in the presence of a strong contraction in economic activity,” explains Beker.
"There is an inflationary inertia that causes past inflation to determine future inflation. Therefore, in the presence of a restrictive monetary policy, the quantities are adjusted first, that is, they reduce production and employment, and only ultimately does inflation drop significantly," he continues.
In this regard, although he admits that "an alternative explanation, to which the current leadership of the Central Bank adheres, maintains that inflation persists in recessionary periods only because the money supply continues to grow," he emphasizes that said debate could be settled if "the zero emission rule until next June allows resistant inflation to be brought down."

The race between prices and wages

As of May 2016, INDEC resumed publishing the consumer price index for Capital and Greater Buenos Aires and resumed the practice of including in its report a set of prices of goods that make up the basket surveyed for the calculation of said index.
The average price increase accumulated from May 2016 to last October totaled 96 percent. That is: prices have practically doubled in these 29 months, warns the report from the Center for the Study of the New Economy.
"However, not all prices varied in equal proportion. Many of those included in the food category did so well above the average," says Beker.
"If the evolution of prices is compared to that of salaries, in the case of registered workers, the average remuneration was 18,042 pesos in May 2016 and 31,523 in September 2018, the last record available, with an increase of 75 percent. In the same period, the increase in retail prices had been 86 percent. This implies a drop in real wages of 6 percent in that period of 29 months. The bonus of 2,500 pesos represents 8 percent of the average salary for September, which would be slightly above the recorded salary loss,” continues the economist.
However, when the most recent period is analyzed, it is observed that the increase in the average salary between September of last year and the same month of the current year was 25.4 percent, while the increase in the Consumer Price Index in the same period was 40.5 percent, with a real salary loss of 11%. “This implies that, although the announced bonus would allow us to return to levels equivalent to those of May 2016, the average salary would be below that reached in September 2017,” he indicates.

Part of the problem and part of the solution?

In 2011, Argentine exports to Brazil totaled 17,319 million dollars. In 2017 they were only 9,308 million. This decrease in Argentine sales to the neighboring country was accompanied by a greater negative balance in the trade balance, which went from 5,009 million dollars in 2011 to 8,680 million in 2017. That is, exports fell much more than imports.
"The recession experienced by the economy of the neighboring country, starting in 2014, was reflected in a lower level of purchases from Argentina. While in 2011 the share of the Brazilian market in Argentine sales abroad represented 21 percent of this total, in 2017 this figure had dropped to 16 percent," illustrates Beker.
For this reason, he admits that a return to growth by Mercosur's largest economy encourages the expectation that it will translate into a recovery in sales for that purpose. “Returning to 2011 levels would imply almost doubling Argentine exports to Brazil,” says the specialist.
The export decline strongly punished the Argentine industry, particularly the automotive industry. Indeed, Brazil is the main destination for exports of this activity, absorbing 65 percent of the total. This represented about 4.3 billion dollars in 2017 compared to about 12,200 in 2011, which was the record year for automotive exports to the neighboring country.
"Returning to the figures of 2011 would imply almost tripling automotive sales to that destination. This could allow a recovery of the ailing automotive industry, which went from manufacturing 829,000 units in 2011 to only 473,000 in 2017. In parallel, the personnel employed by automotive terminals, which reached a peak in 2013 with 35,400 people, would increase. “reduced to 29,000 last year,” completes the director of the Center for the Study of the New Economy.