Drought: At the cost of reserves, they assure the economy has coped better than expected, but now the recession is deepening.

There are reasons that the economy doesn’t understand. The data also indicated that the slippage may have been aging, despite tough public data for economic activity in the past three months, which determined a 1.9% drop in the first semester compared to the same period last year. At least some private reports indicate a greater-than-expected resilience of various manufacturing sectors to the severe drought, however, they warn, this performance has been sustained at the expense of the central bank running out of reserves. Money is dollars.

This situation, the absence of dollars in reserves, now exposes all variables to extreme weakness, the effect of the demonetization already implemented and the possible new corrections that the market is anticipating.

“The impact of demonetisation after STEP will have a knock-on effect on the real economy. As a result of the increase in costs, reduction in consumption and greater uncertainty and difficulties in payments, there will be a negative impact on the sectors of activity that have been relatively less affected so far (industry, construction, trade). imports”, warned a recent Ecolatina report.

The consultant recalled that economic activity fell by 4.8% year-on-year in the second quarter and revealed a contraction of 1.9% year-on-year in the six months to 2023 in June (the latest data released by INDEC). The monthly estimator of economic activity (EMAE) was 4.4% year-on-year, below the same month in 2022, marking three consecutive months of declines. Despite this, “with the exception of agriculture, economic activity shows some resilience: in the second quarter it was stable compared to a year ago (0.5%), while it grew by 1.6% in the first semester. This suggests that the effect of the drought in the second quarter was transferred to other goods and services sectors less than expected.” clarifies, this is the period to expect the most significant impact.”

Fernando Mora, a former deputy minister of the economy during the administration of Martín Guzmán, and the minister’s partner in the consulting firm Sudamericana Visión, already highlighted this justification two months ago. “When one takes agriculture out of the analysis, it can be observed that the net growth of the economy is 1%. Obviously, GDP falling and having such an impact on agriculture and manufacturing is not good news, but other parts of the economy can be observed moving at a rate that has nothing to do with the decline in agriculture. The former official said then.

In its latest report, Ecolatina took up this idea, but found that this growth in economic activity – not counting agriculture – was due to a variety of reasons, including accelerating inflation and a strong exchange rate favoring the consumption of goods and services. Rising prices. That is, the other side of low savings. However, the most relevant aspect for analysts was the use of the yuan and an increase in commercial credit to support the payment of imports, which allowed a greater supply of essential goods without temporarily reducing production.

However, he pointed out that maintaining the level of economic activity (apart from agriculture) came at the cost of reducing international reserves, the deficit of which is now leading to the opposite effect. “Although the phenomenon of drought will gradually disappear from the third quarter, the negative effects of the dollar appreciation on the real economy and inflation have started to have an impact since August. More broadly, payments for imports are again being controlled with greater intensity, and added to the need to deepen the contractual bias of fiscal and monetary policy, while income inflation will A more negative impact of acceleration is noted. It deepens economic recession.”