By the Blouin News Business staff

Industrial production decline signals Argentina’s economic woes

by in Americas.

Argentina's President Cristina Kirchner and the industrial production downfall

Cristina Kirchner gets into a car manufactured in Argentina in November 2010. Photo: AFP/Getty Images

Argentina president Cristina Kirchner is haunted by the fear that economic history will repeat itself. New data only feeds that foreboding: the country’s industrial production in 2012 fell 1.2% year-on-year, according to Indec, the national statistics bureau.

It was the first such decline in ten years, since back when a severe economic crisis saw Argentina default on its sovereign debt. That it has occurred again feeds into the unceasing speculation that the country may have to default another time, due in part by on-going litigation with U.S. investor funds over the country’s defaulted bonds. Kirchner’s nightmare appears ever closer to becoming a reality.

The government says that the fall is explained by less car-making and basic metals fabrication (down 6.6% and 8.7%, respectively). That has confounded its predictions that the factory production rebound the country saw in October would continue through the end of the year. Factory output in December fell by 3.4% compared to a year earlier.

One contributing factor is that the protectionist trade policy of the Kirchner government delayed the import of foreign-made parts needed by the car industry. Another is that the slowdown in the Brazilian economy has cut the demand there for Argentinian-made cars. Even though Argentina’s trade surplus in 2012 widened to $12.7 billion from $10 billion the previous year, this was due entirely to the 7.3% decline in imports; exports fell by 3.3%.

Industrial production in the third-largest economy in Latin America had begun the year, in January 2012, positively, growing 2.1% year-on-year. The downfall experienced during the rest of the year signals the economic trouble the country is going through after years of high rates of growth, roughly twice those of its northern neighbor, Brazil. Some 80% of Argentina’s imports are capital goods, energy and other products needed for production. The cost of protectionist trade policies to growth and investment was inevitable, feeding in to the overall gloomy business sentiment. Domestic demand has fallen in part as an effect of the government’s restriction on the purchase of dollars.

High inflation is Argentina’s biggest problem and “a symptom of its wars of distribution between agriculture and industry, and industry and labor,” says Albert Fishlow, a former U.S. deputy assistant secretary of state for inter-American affairs. Even the official inflation figures,  not always to be relied on, show price rises reaching double digits, at 10.8%, while the true number could be as high as 25.6%, according to an index presented by opposition lawmakers based in the analysis of nine private agencies.

This makes it the country with the highest inflation rate in Latin America. Combined with low growth, that sets the background for a situation the country is only too familiar with and one that will do nothing to allay Kirchner’s fears.