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Are we already in recession?: the economy would collapse by up to 6% in the first quarter due to the decline in consumption

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Economists have already begun to realize this due to the adjustment plan and the inflationary shock signs of what could be the start of a new recession and for the first quarter they expect a decline in product of up to 6% on an annual basis, He the largest accident since the third quarter of 2020 when the economy collapsed by 10% due to the paralysis of activity due to the pandemic and restrictions.

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After being elected president, Javier Milei anticipated their arrival in November “six very hard months.” The business was already virtually stagnant and affected by Droughtbut then came the devaluation of December, the end of price agreements and new wave of increases which brought inflation to a record 25.5% in December, without important measures to rebuild income.

In this context, at least 20 indicators have turned red in recent months, showing a reduction in consumption, activity, livestock slaughter, imports, petrol sales, electricity consumption, municipal acts and loans to the private sector. Industry and construction data have now been added, with drops of 12.2% and 12.8% year-on-year in December.

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“We are starting to see a contraction in consumption. Sales in supermarkets and wholesale decreased by 7.5% and 11.3% monthly in November. December and January are worse. The numbers leave no room for doubt: We are already going through the recession. Even though it was something we predicted, it is still shocking,” says a report from Econviews, Miguel Kiguel’s consultancy firm.

Another alert went off in January with collections declining 6% year-on-year, driven by significant declines in business and profit-related taxes, although tempered by improvements in foreign trade taxes due to devaluation and increased of the rates. “The harvest anticipates a strong recession”, estimates Martín Polo, Cohen’s head of strategy.

For EcoGo, they anticipate the latest data a first quarter down by 4.8% compared to the previous quarter of the seasonally adjusted series e a decline of 6% year-on-year, very similar to what Econviews expects. “From the collection data it is clear that the drop in wages is strong and this translates into a very affected demand,” explained Lucio Garay Méndez, of EcoGo.

With parities failing to match inflation, formal salaries with social security contributions took a fresh hit in December and fell by almost 14% year-on-year in real terms. “In constant currency, that means return to July 2005 salariesthe largest real year-on-year decline since the exit from convertibility in March 2003,” said economist Salvador Vitelli.

In the latest IMF staff report, the Government acknowledged that poverty is already around 50%, almost 10 points higher than in the second quarter of 2023 and a level not seen for 20 years. This indicator is not higher because the recession has not yet affected employment, although there are already suspensions in some automotive terminals and layoffs in construction.

For the IMF the economy is moving towards “stagflation”, with a CPI remaining at 25% in January and only starting to decelerate due to falling demand, it is expected a decline in GDP of 2.8% in 2024. The diagnosis coincides with that of the government, according to which the inflationary leap “cannot be passed on to prices” and a real recession is expected.

Javier Milei proposed to reduce the inherited fiscal deficit by 6 points of GDP with an unprecedented adjustment to lower inflation, but the thawing of prices and the lowering of forward rates caused a liquefaction of weights. This process will deepen with ongoing rate increases and in the event that a new devaluation or exchange rate increase occurs, as expected by the market.

In this context, the economy could collapse by 4.1% year-on-year in the first quarter, according to Francisco Ritorto. “The correction of relative prices deteriorates real income and strongly affects consumption, especially in the first quarter. If we start to see the fiscal effort desired by the government, the fiscal impulse becomes limited,” said the ACM economist.

Two consecutive quarters of decline is considered a recession. Thus, after a probably negative fourth quarter of 2023 (the data is not yet known), the semester would end in March. “We expect a 5.3% decline in the first quarter and a year-on-year decline in all quarters, a sharp contraction in consumption and government spending,” said Claudio Caprarulo, an economist at Analytica.

Source: Clarin

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