Lower inflation and incipient recovery improves economic prospects
Monthly inflation fell from 4.7% in March to 2.7% in June. Early indicators, based on online prices, suggest that monthly inflation may end July at close to 2%. And economic activity indicators, though still in negative territory compared with 2018, show improvements with respect to Q1 2019. This suggests that the real economy has bottomed out, and is slowly recovering.
These trends have emerged from the climate of lower FX volatility achieved since April, when the Central Bank, with the support of the IMF, announced a greater concern with the stability of the FX market.
In practice, the exchange rate has become a monetary policy intermediate target, complementary to stabilizing the monetary base. The latter had been the exclusive intermediate target of the monetary strategy announced at the end of September 2018, simultaneous with a commitment to severely limiting Central Bank intervention in the FX market.
In Q4 2018 and Q1 2019, the extreme instability of FX and the acceleration of inflation in spite of the monetary contraction convinced Central Bank authorities and IMF staff that such a severe limitation had to be abandoned.
It may sound overly optimistic to forecast an improvement in economic prospects for the remainder of 2019 and 2020, only 20 days from the crucial PASO (Obligatory Simultaneous Open Primaries) election. But the better economic climate increases the chances for President Mauricio Macri to win reelection in October, and may reinforce the trend toward an incipient recovery, with inflation fluctuating around 2% per month for the rest of 2019.
The vicious circle that started in May 2018, when deteriorating economic conditions created disruptive political uncertainties associated with the possible return of Kirchnerism to power, seems to have transformed into a virtuous circle of improved economic prospects since May 2019, with better chances of reelection for Macri and of a defeat of Kirchnerism in the province of Buenos Aires. The latter is particularly important, because the local gubernatorial candidate there is Axel Kicillof, the emblematic economic minister of Cristina Kirchner’s second term.
At the same time, the experience of his first term convinced Macri of the need to enlarge the sources of political support targeting non-Kirchnerist republican Peronists. This political attitude increases his chances of obtaining congressional support for the much-needed structural reforms of the tax, labor and social security regimes.
Now read on...
Register to sample a report