Less growth, higher deficit – the potential economic impact of ‘second wave’ lockdown

One year on from Argentina’s strict Covid-19 lockdown, a second wave of infections looms on the horizon, this time accompanied by the circulation of new, more contagious strains of the virus and a slow vaccination rate. 

The cocktail threatens to impact on the economic recovery, yet Productive Development Minister Matías Kulfas has declared that “it will not be necessary to resort to closures like last year." He says industry has "learned to produce" while complying with health protocols. Experts, for now, tend to agree. Those consulted by Perfil believe that a strict quarantine, as witnessed in 2020, is "unlikely" due to Argentina’s fierce socioeconomic deterioration: last year ended with a poverty rate of 42 percent, with unemployment at 11 percent, and an economic contraction of 9.9 percent of gross domestic product.

“We do not see a margin for restrictions such as those in March-April 2020, and less in an election year, to close up again with 42 percent poverty. Although very harsh measures could be decreed, we do not believe that society would comply,” Martín Vauthier, the director of Eco Go consultancy firm, told Perfil.

Nevertheless, most analysts believe that in the face of a worsening of the health situation, "targeted measures" could be applied that would restrict movement and slow infections. They predict that the worst-hit sectors would again be the service industry, tourism, hotels, restaurants, entertainment and cultural activities. These are the “slowest” sectors in terms of recovery, which remain at “well below pre-pandemic levels," underlined Vauthier.

What impact would a second-wave second shutdown have? Matías Rajnerman, from Ecolatina, unfolds the dynamics as such: “A strong wave of Covid that implies more restrictions would directly affect activity, and would hit the fiscal deficit which would increase due to lower collection generated by lower consumption and, at the same time, due to the strengthening of spending on programmes that would be used to alleviate the effect of the pandemic a little. And that could affect the parallel dollar and the official dollar a little.”

Growth

Economic activity in Argentina has started the year better than anticipated, with a rebound of 1.9 percent in January from December. This inspired some analysts to recalculate their forecasts for the year to eight percent growth, above the government’s prediction of seven percent. The introduction of potential restrictions, however, would trim the recovery by between 0.5 and 1.5 points, according to experts.

EconViews economist Andrés Borenstein said that the “statistical carryover” from January indicated that eight percent was plausible, but he said his agency was still forecasting seven percent “because we believe that there will be some issues related to Covid.”

He too ruled out the change of a return to strict quarantine measures, though he said “there may be closures focused either geographically or on some sectors” of industries.”

Vauthier agrees with the eight-percent figure, though he stressed that those targets would be out of reach “if restrictions appear or if people go out less and consume less as precautions.”

At the Buenos Aires-based consultancy firm Analytica, experts consider that there could be “limitations on circulation as of April, which will be reflected in lower growth during the second and third quarters, and a higher level of activity in the last quarter." Such measures would make a growth rate of 6.5 percent more likely, they said in a statement. 

Likewise, experts at Consultatio foresee that "if they restrict activity in certain sectors, the impact on activity could cost between 0.5 and 1.5 points of growth compared to our base scenario of growth of 6.5 percent."

Fernando Marull, an economist with FMyA, said his firm was forecasting six percent, provided there was no return to a strict Phase I lockdown.

Fiscal deficit

After posting a primary fiscal deficit of 6.5 percent of GDP in the red last year, the Alberto Fernández administration’s 2021 Budget contemplated a figure of 4.5 percent this year.

Aldo Abram, the director of the Fundación Libertad y Progreso public policy research centre, feels like this would be out of reach, should tighter restrictions be introduced.

“The more the government restricts, the more it will have to assist families and companies, and the risk is more public spending. With this, the deficit they have committed to would be further away,” he told Perfil.

For Borenstein, “the fiscal accounts are relatively good, due to the increase in revenue and what is going to be collected by wealth tax.” But he considers that new quarantines – and accompanying welfare support programmes – would require the State to “spend less on infrastructure.” He sees spending potentially as a “risk” but not yet “out of control.”

At Analytica, they project that "re-implementing the IFE [emergency payment] until the end of the year would imply an increase in spending by 0.7 points of GDP,” which would in turn require more revenue to avoid a larger deficit.

For his part, Martín Kalos, from Epyca, says that "the main discussion on the fiscal deficit focuses on variables such as subsidised utility rates."

"It may happen that it is decided to give subsidies greater than those budgeted to alleviate the burden of public services for homes in a year that, due to the pandemic, may continue to be very difficult," he said.

Others, however, are keeping an eye on the exchange rate, another area where the economic impact of renewed lockdowns could be felt. Abram explained that in the face of lower income and more public spending, "there is a risk of higher issuance, and therefore a depreciation of the peso that will imply a rise in parallel dollars, and in goods and services – that is, more inflation."