16 febrero 2022

From unemployment to reactivation with inflation. Published on Cronista.com

Argentina has been undergoing a period of stagflation (stagnation + inflation) for more than fifteen (15) years, with an increase in the unemployment rate. But some ten months ago it started a process of reactivation with inflation (Reactiflation) with a striking growth in employment.

“Stagflation” is a term coined in 1965 by the then British Chancellor of the Exchequer Ian McLeod, who in a speech warning the House of Commons of the gravity of the situation, said: “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation”.

Article by Julián A. de Diego published on Cronista.com on February 16, 2022

Reactinflación (in Spanish) or Reactivation plus Inflation (Reactiflation in English) is a compound word, a portmanteau, that is used to describe Argentina’s current situation, where all levels of the economy are being reactivated in a context of high inflation and growing employment.

As a matter of fact, the Argentine experience has been studied as a unique phenomenon, similar to Japan or New Zealand, and once again defies the law of probability and traditional economic rules, first by undermining the economy with high inflation, and now with a remarkable economic growth (10.9% was in 2021) forecasting no less than 5% for 2022, while inflation continues to be significantly high (50.2% for 2021, and estimated at 55/60% for 2022).

Strictly speaking, during the Convertibility Plan, which lasted ten years, the Argentine peso was pegged to the US dollar (1 peso = 1 dollar), and then came the 2001 financial meltdown.

Right now, the phenomenon of Reactiflation (or Reactinflación in Spanish) combines the two sides of the same coin, opposing special abilities and challenges. On the one hand, the economy is reactivating and creating new jobs in an attempt to consolidate growth; and on the other, it is adversely hit by high inflation, taxes, public spending and fiscal deficit funded by dangerous currency printing. This is a schizophrenic country where dissociative power is constantly offering a dichotomy, typical of an intrinsic controversy that seems irreconcilable.

Curiously enough, the ruling party and its cronies construct a scenario similar to that of the opposition, divided into ten blocks with their respective candidates running for president and quite disoriented when addressing key issues such as Budget, the IMF Plan, subsidies, taxes, the role of the State, among others.

In any case, reactivation is a proven fact. First, it was the construction industry that began to return to activity with a rippling effect for related industries (materials, cement, lime, sand, concrete, bricks, electricity, openings, painting, equipment, infrastructure, amenities and others), followed by essential services (processed food and fresh produce, cleaning, commodities) and all related sectors. Public works and large undertakings have also played their part.

Agriculture in general has kept reasonable levels of activity, including the manufacture of equipment and machinery, agricultural production, fertilizers, meat processing plants and canned products and exports. The same happened with regional products that created new export opportunities.

At the same time, new technologies, unicorns, and applied systems have grown quite similarly, where companies find it hard to meet their demand for employees because of a lack of digital skills and a shortage of graduates from related technical fields.

Small and medium-sized industries have significantly increased the use of their idle capacity, and returned to pre-pandemic levels in terms of volume or number of units produced, and sales at constant values.

Strategic industries, such as mining -especially lithium mining- and the oil and gas sector in general are gradually recovering their historical levels, reducing the number of furloughed workers.

Domestic workers have exceeded the historical level of 1.5 million jobs, thanks to the reactivation of domestic tourism, and the return to the new normal after lockdown.

Another activity undergoing a process of full transformation and growth is logistics as a result of a change in consumers’ behavior and habits, the use of apps for passenger transport and the delivery of products and door-to-door services.

Domestic tourism has also boomed reaching historical records, a sector that is characterized by intensive labor, with all its related services. Transatlantic cruises and international flights are gradually allowed to operate.

The recovery of these sectors is undoubtedly motivated by the changes in the market, and the uncertainty created by contradictory government measures still influences the perspective for the future. Although some reforms are known to derive from the IMF Agreement, the truth is that the fundamental structural changes, if any, are still completely unknown, but they will surely help improve the system with effective measures aimed at reducing the impact of high inflation and attaining sustainable growth. In any case, we are leaving stagflation behind and entering a phase of “Reactiflation” with job creation, which has the positive effect of arousing a feeling of recovery and growth, but it is still subject to necessary fundamental reforms that require a supporting, stable, predictable market.

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