Recession Feared in Argentina as Cracks in Economy Grow

(Bloomberg) -- Signs are mounting that Argentina is headed toward recession in the next few months, less than two years after emerging from the latest one.

A severe drought and currency crisis shook Latin America’s third-largest economy just as President Mauricio Macri sought to consolidate its incipient recovery. Economic activity fell 2.7 percent in April, the largest monthly decline since Macri took office in December 2015. Growth also declined on an annual basis for the first time in 14 months, the nation’s statistics agency reported Tuesday.

The drought hamstrung production of soy, Argentina’s chief export that supports many industries and is a key source of government revenue. Agricultural economic activity plunged 30.8 percent in April, according to official data published Tuesday. And the currency crisis forced the central bank to raise rates to 40 percent, further weighing on economic activity.

“It’s almost certain that Argentina will fall into recession,” said Fausto Spotorno, chief economist at consultancy Orlando J. Ferreres & Asociados. “We won’t see the recovery until the end of the year.”

Recession Feared in Argentina as Cracks in Economy Grow

A recession would complicate Macri’s plans to further cut government expenditures as agreed with the International Monetary Fund in exchange for a $50 billion credit line. Macri won the 2015 election promising to spark growth with a pro-business agenda, but stubbornly-high inflation and his initial spending cuts have hampered the economy.

More Cracks

Signs of economic trouble are increasingly apparent. Argentina’s leading private construction index declined 5 percent in May, and it’s been down four of the last six months. Chances of a recession in 2018 rose to 68.1 percent in May from 24.4 percent in April, according to a leading index published by Torcuato Di Tella University.

And at least three consumer brands are running into trouble. Longvie, a kitchenware retailer, had its debt rating cut last week by Fix SCR, an Argentine subsidiary of Fitch Ratings, which cited a decline in consumer demand for its decision. Carsa and Santiago Saenz, two large retailers, both requested in the last few months a court procedure against bankruptcy similar to the U.S. Chapter 11.

To be sure, most economists forecast a brief recession, with gross domestic product shrinking for two or three consecutive quarters at most. Argentina’s central bank also predicts only a “temporary deceleration” in growth this year. The bank’s monthly poll of independent economists shows contractions for the second and third quarters. The previous poll showed both quarters flat or in positive territory.

“It will be a mild recession,” said Daniel Artana, chief economist at the Latin American Economic Research Foundation. But he warned it could get worse if Brazil and the U.S. raise rates faster than expected and emerging markets as whole continue to sell off. “It depends on what happens in the rest of the world in the months ahead, not just in Argentina.”

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