No reason to reactivate | Government celebrates its best week yet finds no answers to recession

Senate approval of the Basic Law, a one-year extension of the currency exchange with China worth the equivalent of $5 billion, an $800 million payout to the IMF, and inflation of 4.2 percent in May. They gave the government a break. having gone through a semester of failures during which he unleashed a crisis of capital proportions.

However, one of the best weeks in six months for the ruling party was not enough to dispel doubts about the sustainability of the economic program and, even less, about how it will solve the new fundamental problems that it has created: recession, job destruction and widening social inequality.

“Recessions are a dangerous animal because they can be very powerful in stopping inflation, but afterwards they are very difficult to manage. They are like a bad dog that scares away thieves, but then they stay on the property and you don’t take them.” again. It’s easy to get into a recession and use it to cool rising prices, but getting out of it is very difficult and requires a lot of management.“, explains Jorge Carrera, former vice-president of the Central Bank.

This is where the government is at. The sanctions of the Basic Law will not be enough to change this situation. This is an outstanding political success, opening up the possibility of money laundering, privatization and investment promotion, as well as a moratorium on SMEs and an increase in profits to the fourth category, if the Chamber of Deputies reverses the Senate’s refusal of this opportunity. But these are measures that will not have an effect in the short term and who are not focused on rescuing the economy from the hole it has been thrown into.

“The approval of a law is an important event for the government, more because of what might happen if it were not approved than because of the approval itself. This is not to detract from its merits, but if the law fails, it will be much more serious for Miley than what he can achieve with the cut project that was finally voted on. To reboot the economy, it is necessary to find a way out of the recession, and with the Basic Law there is no such thing.“, the economist interprets.

What yes, what no

“There are two aspects to the analysis of the Basic Law. On the one side is the political achievement of the government, which has won approval for a sweeping reform package that will give it the tools to govern. It serves to show the market, international organizations and citizens that it has the governance to implement its agenda. This confirms Milei’s reputation and gives it greater credibility,” analyzes Sergio Chouza from Sarandí Consulting.

The second dimension is the extent to which the mandated reforms will help stop the decline in activity levels and begin to correct the curve, which for now continues to point downward.

“The macroeconomic situation is not improved by the law. Much work is required to restore the conditions for a stable macroeconomic situation that ensures sustainable growth,” the economist warns. “Investment drivers depend on the strength of the domestic market, the ability to do business, and the relocation of operations. Unless purchasing power improves, investment incentives will be the last thing companies look to to invest in the country.“, he notes.

Another important aspect is the lack of stability on the external front, which ultimately affects the functioning of the economy as a whole.. “Tax benefits and a favorable regulatory environment can be important factors for large companies, but they are the fifth element to consider when investing,” says Chowza. Before doing this, he points out, they are observing to what extent they can withdraw the profits made in a currency constraint scenario like the one the country is currently facing.

“It is also a mistake to remain focused on such aspects of the micro-functioning of the economy as labor reform. No one can think that a flurry of investments will come due to the extension of the probationary period.. If there is no opportunity to increase sales, develop in a thriving domestic market with growth prospects, investment will not flow as the government expects,” he adds.

Inflation and wages

The central point of the government’s strategy is to reduce inflation as a reactivation mechanism. But only now will it become clear whether he will succeed in this matter. “The hardest part is yet to come. Moving from 25 percent to 5 percent is not the same as reversing price action into the 1 or 2 percent range.“, Chouza points out.

Carrera agrees with the diagnosis. “What the government has done so far has been to reduce self-inflicted inflation through an initial devaluation as part of the relative price adjustment that has not yet ended. What the economic team can show is that it was a good fireman, managing to put out the fire it caused through its measures.. But this came with a huge contraction in economic activity, which gave rise to the recession problem we have now. “There are no engines from there,” he warns.

In addition to reducing inflation, to restore the economy it is necessary to restore wages and incomes.

“It’s very difficult to think that 2024 will be the year of wage recovery. compromise between unemployment and purchasing power. With rising unemployment, it is very difficult for joint ventures to grow.. Private consumption is likely to continue to stagnate or fall in the coming months, so I do not see conditions for economic recovery in the short term,” concludes the head of Consultora Sarandí.