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By Sarah Marsh
BUENOS AIRES May 23 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
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
"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."
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
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)