Thursday, November 30, 2023

ECONOMY | 20-09-2023 08:52

Argentina's economy shrank most since 2020 amid record drought

Argentina's GDP shrank 2.8% in the second quarter of the year, more than the 2.5% contraction forecast by experts. From a year ago, activity contracted 4.9%.

Argentina’s economy contracted more than expected between April and June, the worst quarter since the peak of the pandemic in early 2020, confirming the country is barreling into a deep recession. 

Gross domestic product in South America’s second-largest economy shrank 2.8 percent in the second quarter from the January to March period, more than the 2.5 percent contraction seen in a Bloomberg survey. From a year ago, GDP contracted 4.9 percent, according to government data published by the INDEC national statistics bureau on Wednesday.

A record drought that cost US$20 billion of agriculture exports and accelerated food inflation took a heavy toll on economic activity in Argentina. Overall exports during the second quarter declined 4.1 percent while imports rose 3.7 percent, weighing down growth. Consumer spending dropped while government expenditure was flat during the quarter.  

The outlook has only worsened in recent months after the government devalued the peso after the August 13 primary election, a sign that the Central Bank had run out of money to prop up the currency. 

Argentina’s deepening economic crisis has opened the door for outsider presidential candidate Javier Milei to win the October 22 general election. Milei stunned the nation when he won the August primary vote after inaccurate polls showed him finishing in third. Milei has inspired voters dramatic promises, including to dollarise the economy as a radical plan to quash inflation.

“The severe drought that hurt Argentine crop yields and agricultural exports drove a sharp contraction in second-quarter GDP, as expected, but household consumption was surprisingly weak, as well. We expect the latter to remain subdued in coming months amid high interest rates, unanchored inflation expectations and an opaque policy outlook," said Adriana Dupita, Bloomberg's Latin America economist.

That devaluation prompted businesses to hike prices some 20 percent overnight, resulting in Argentina’s highest inflation reading since the country was exiting hyperinflation in the early 1990s. Dizzying price increases have undoubtedly hurt real wages and consumer spending, dragging growth lower during the current quarter.  

Argentina’s economy is expected to technically enter its sixth recession in a decade as per the most common definition by economists — two consecutive contractions  — during the third quarter as inflation gallops past 124 percent, fuelled by economic policy failures and uncertainty surrounding the presidential election. With quarterly contractions forecast for this quarter and the next, economists surveyed by the central bank see GDP declining three percent this year.

by Manuela Tobias, Bloomberg


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