Local economists warn of deeper slump as crisis continues.

Argentina's escalating financial crisis is prompting local economists to replace forecasts for a rebound in growth in 2020 with predictions of a third year of contraction.

The Central Bank on Tuesday released a monthly survey of economists which projected a toxic mixture of declining gross domestic product, faster inflation and a slump in the peso. The economy is now seen shrinking 2.5 percent in 2019 compared with a July projection of minus 1.5 percent. Banks such as Goldman Sachs and Barclays have also revised down their bets.

The sharp turnaround in fortunes comes as President Mauricio Macri looks almost certain to lose to opposition candidate Alberto Fernández in the October election. That outlook has scared investors and forced the current administration to seek to pacify them with a re-profiling of the nation's debt, price freezes, minimum wage hikes and even capital and currency controls.

"Argentina is heading for a credit crunch," said Marcos Buscaglia, senior partner of the Buenos Aires-based investment firm Alberdi Partners. "It's also facing a loss of confidence, a brutal drop in growth and an increase in inflation."

His firm had forecast a contraction of one percent this year; but now expects a two to three percent decline in GDP. For 2020, it anticipates the economy will shrink between four and five percent.

The central bank's so-called 'REM' survey, which accepted its last forecasts on Friday, showed that the median expectation among Argentine economists is now for a contraction of 1.1 percent in 2020, down from a previous projection of two-percent growth in July. Thirty-nine economists took part in the poll, the lowest number since the start of 2018.

Forecasting Argentina's unpredictable economy is a challenge at the best of times. With polls published prior to the primaries showing a pretty evenly balanced contest, analysts had based their outlooks on a Macri win and a continuation of his pro-business policies. While Fernández's plans for the economy remain deliberately vague, his running-mate - former president Cristina Fernández de Kirchner - alarms investors horrified by her interventionist policies in her two presidential terms of office, from December 2007 to December 2015.

Last Friday Goldman Sachs revised downwards its forecast for both 2019 and 2020, to minus 3.2% and minus1.6% respectively. Like Buscaglia, Alberto Ramos, the investment bank's chief Latin America economist, stressed that the latest forecasts were tentative, given the fluid nature of developments in Argentina. Nevertheless, the trend is clear.

"Tighter financial conditions will significantly affect the performance of the economy through the end of the year," he said. "And we think those tighter conditions are with us for most, if not all, of next year."

Inflation is now set to reach 55 percent by the end of year, up from an earlier estimate of 40 percent, the Central Bank survey also showed. Meanwhile the peso will fall to over 66 per US dollar by the end of 2019, compared with the prior forecast of 50 per greenback.

"Our main case for Argentina was disinflation, and now the scenario is upside down," says Daphne Wlasek, XP Investments macro strategist. The company is now projecting inflation at 60 percent at the end of 2019 from 35 to 40 percent.

"Argentina's macroeconomic scenario changed completely from the primary vote," she added. "Inflation is in an upward trajectory and growth won't come anytime soon."

COMENTARY:

The article being used for this commentary talks about the decline in GDP growth due to the Argentinian crisis (Iglesias, 2019)."The central bank's so-called 'REM' survey, which accepted its last forecasts on Friday, showed that the expectations among Argentine economists are now for a contraction of economic growth of 1.1 percent in 2020, down from a previous projection of 2% growth in July." The crisis in Argentina has changed economists' opinions and made them rethink their forecasts, changing it from a positive outlook to a negative one. "It is also facing a loss of confidence, a brutal drop in growth, and an increase in inflation"(Iglesias, 2019). With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and, therefore, GDP decreases. The relevant point being made about the increase in the minimum wage is that it will cause firms' labor costs to increase, and this may cause firms to fire workers to keep their costs low. This will have a negative effect on employment (in the long run) and could even cause GDP growth to decline due to the reduction in the output being produced by workers.

The economic concepts mentioned and analyzed in this article are Aggregate Supply (AS), which is the total supply of goods and services produced within an economy at a certain price level in a certain period (Kenton, 2020). The short-run is the period that starts immediately after the increase in the price level; the quantity of supplies increases when prices rise (Chappelow, 2020). The long-run is defined as the period when input prices adjust to the number of final goods (Chappelow, 2020). In the long run, capital, technology, and labor effect AS the efficiency at which they are used in production are assumed to be optimally (Openstax). Argentina has an inflationary scenario. Therefore a rise in the price level will cause an expansion of AS. An increase in minimum wages is expected to have an inflationary effect since, by increasing the prices of wages, the company must compensate by increasing the price of its products on the market (Kenton, 2020). Since goods cost more, and the rise in the minimum wage could not be enough to increase consumer's purchasing power, and the salary will rise again, causing an inflationary spiral (the result of a rapid increase in average price level resulting from inflation leading to higher wages, the result is cost-push inflation).

Figure 1

Figure 1 shows a shift in the aggregate demand curve to the left. The aggregate demand curve tends to shift to the left when total consumer spending declines. Consumers might spend less because the cost of living is rising or because government taxes have increased. In Argentina's case, consumer spending has decreased because the high prices caused by inflation are lowering down consumers' confidence. Change in investment spending had occurred because investors are discouraged in a possible election of Fernández as president since his plans for the economy remain deliberately vague, and his running mate, Cristina Kirchner had interventionist policies that did not go well when she was the president.

Figure 2

''That outlook has scared investors and forced the current administration to seek to pacify them with a re-profiling of the nation's debt, price freezes, minimum wage hikes, and even capital and currency controls.'' Figure 2 shows that the aggregate supply curve shifts to the left due to an increase in wage. The increase in wages reduces the costs of production and leads to a decrease in the SRAS. Therefore, it shifts leftwards. Argentina has increased the minimum wage also to increase consumer confidence, boost the economy, so then investors will be more confident in investing in the country's economy.

Argentina is not in a good position as the investors and economists do not see with good eyes the election of Fernández, whose economic proposals are vague, and his running mate, Christina Kirchner, had brought problems to the Argentinian economy when she was the president.

The future of Argentina relies on the elections that are taking place on the 27 of October of 2019. The turnaround for Argentina could be working to increase the labor wages because expanding the population's input would contribute to better lives of consumers and rising living standards. They could also improve Foreign Direct Investments (FDI) not only to add to the GDP numbers but also to bring companies and to create jobs. These impacts are very much needed in Argentina since they have record unemployment numbers.

Bibliography

Iglesias, Eugenia. "Local Economists Warn of Deeper Slump as Crisis Continues." Buenos Aires Times, Buenos Aires Times, 7 Sept. 2019, www.batimes.com.ar/news/economy/local-economists-warn-of-deeper-slump-as-crisis-continues.phtml.

Kenton, Will. "Aggregate Demand Definition." Investopedia, Investopedia, 5 Feb. 2020, www.investopedia.com/terms/a/aggregatedemand.asp.

Chappelow, Jim. "Law Of Supply Definition." Investopedia, Investopedia, 29 Jan. 2020, www.investopedia.com/terms/l/lawofsupply.asp.

OpenStax. "7.3 The Structure of Costs in the Long Run." Principles of Economics, www.opentextbc.ca/principlesofeconomics/chapter/7-3-the-structure-of-costs-in-the-long-run/

Kenton, Will. "Wage Push Inflation." Investopedia, Investopedia, 29 Jan. 2020, www.investopedia.com/terms/w/wage-push-inflation.asp.