Argentine economy faces first slump since end of debt crisis

BUENOS AIRES Fri May 23, 2014 11:52am EDT

1 of 2. Pedestrian walk past a store that went out of business, now for rent, in Buenos Aires May 22, 2014.

Credit: Reuters/Marcos Brindicci

BUENOS AIRES (Reuters) - After a decade of growth, Argentina faces a sharp decline this year as industrial output falls and one of the world's highest inflation rates hits consumer spending and new investment.

The economy had grown steadily since recovering from a 2001-2003 debt crisis and it expanded 3 percent last year but it stumbled in the fourth quarter and likely slid into a recession at the start of this year.

That is now expected to drag on for most or all of 2014.

Critics have for years predicted that President Cristina Fernandez's populist and interventionist policies would push the economy into recession. Paradoxically, it is a tentative switch towards more pragmatic policies that investors have long called for that has apparently tipped it over the edge.

A devaluation of the peso currency and a hike in interest rates in January worsened a new weakness in consumer spending, a pillar of the economy that had helped it withstand external shocks like the 2009 financial crisis.

The measures have hit spending and prompted economists to revise downwards their already bleak forecasts for 2014.

The consensus view now is that the economy will shrink around 1 percent, the first full-year contraction since the debt crisis, when Argentina defaulted on $100 billion.

Output contracted 4.4 percent in 2001 and a stunning 10.9 percent the following year but since then has grown at an average of 6.2 percent a year.

"We were already doing badly but the devaluation of January has made the situation even more critical," said former central bank chief Rodolfo Rossi. "There is no confidence among firms and workers are losing ever more purchasing power."

Retailers are feeling the squeeze.

"Sales have plummeted, especially for anything that is not a basic need, like furniture," said Debora Rosenfeld, working in a

Buenos Aires store that sells chairs, tables and sofas. Its revenue has fallen 30-40 percent this year.

"No one has come in the store today," she said one afternoon this week, adding that the owner was moving the business to a cheaper location. Rosenfeld is a trained architect but gave up her junior position during the last crisis to get a higher-paying retail job just so she could pay the bills.

A recession near the end of Fernandez' presidency would further hit her approval ratings, already low at 30 percent, and weaken her ability to push an ally to succeed her in elections next year.

It would also put more strain on dwindling foreign reserves and risk sparking social unrest. The government estimates the poverty rate at 5 percent but private analysts say it is at least five times higher.

ARGENTINES GIVING UP BEEF

The shift in policies in January was aimed at restoring the economy to better health in the medium term. But it is causing pain now and critics say it may also fail because the government has not cut its own spending.

The 20 percent devaluation - the biggest in a decade - stoked inflation as Argentines, who often think in dollars because they lack faith in their own currency, raised prices to adjust to the new exchange rate.

It also made the cost in pesos of imported goods and big-ticket items like houses that are sold in dollars jump.

Independent economists see inflation hitting at least 30 percent this year with some predicting as much as 45 percent.

Salaries are not keeping up so real wages fell at one of the fastest clips since 2002 in the first quarter, think tank Ecolatina said.

"It's becoming more difficult to keep your head above water each month, the wages aren't enough," said Antonella Cardoso, working at a sales stand in a Buenos Aires shopping centre.

"When you go to the supermarket, the money that used to buy enough food for a week will now only buy enough for two days," the 28-year old mother of young twins said.

The hike in prices is even hitting beef consumption in a country where "asado", beef roasted on a barbecue, is part of the national identity. Consumption fell more than 5 percent in the first quarter of this year, agriculture ministry data shows.

"I eat less beef, and more chicken and pork because it doesn't cost as much," said 54-year old city resident Carlos Molina. "You have to change your diet."

Attempts to tame prices and shore up dollar reserves, such as a hike in interest rates and cut in energy subsidies, are also weighing on consumers.

"<The measures> have cooled consumption, which was the motor of economic growth for the last seven years," Ecolatina said in a research note. "We do not expect consumption to grow in 2014."

INDUSTRY WOES

Declining real wages, expensive credit and a new tax on mid-range and high-end autos that has sent prices soaring has hammered domestic demand for cars, Argentina's main manufacturing industry.

New legislation implemented from January levies a 50 per cent tax on cars worth more than 220,000 pesos ($27,286) and 30 per cent on models valued at more than 125,000 pesos ($15,504).

A salesman at a BMW showroom in an upmarket district said prices had jumped 60 percent. "Sales have fallen a lot. We are just holding out until customers get used to the new prices," he said, noting he had not had a single customer that day.

Demand is also cooling in Brazil, the main destination for Argentine auto exports. To top it off, import restrictions are making it difficult for manufacturers to acquire key parts.

Car factories are slashing output and putting thousands of workers on shorter work hours, driving a decline in the industrial sector that has been in recession for three quarters.

Many analysts say the government must lift the restrictions and economic imbalances they say are choking the economy and take even bolder reforms to help revive business.

"What they did was consequential and will impact growth this year," said Alberto Ramos at Goldman Sachs. "But in terms of adjustment we are not even close to where we need to be."

(Additional reporting by Alejandro Lifschitz and Nicolas Misculin; Editing by Kieran Murray)

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