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Anxious Argentines tighten their purse strings
Reuters
July 02, 2008

BUENOS AIRES, July 2 (Reuters) - Argentines are putting the brakes on a five-year spending spree as high inflation cuts into their wages and a farm revolt over export taxes saps confidence in the government and the economy.

Lucila Perez Portillo, 32, and her sister sell designer shoes and accessories in a middle-class neighborhood in Buenos Aires. Sales were booming until last month, when they suddenly dropped by 70 percent.

"The retail sector has ground to a halt," she said. "We're all going through a time of uncertainty. You save your money because you don't know what to expect and because this country has had so many crises."

Consumer confidence is at a five-year low in Latin America's No. 3 economy, battered by soaring inflation expectations and farmer protests that have caused sporadic food and fuel shortages since March.

Argentines increasingly blame center-left President Cristina Fernandez for not resolving the unwieldy dispute, which has revived memories of the economic crisis and street protests that forced a president out of office in 2001.

Official figures show the economy growing for a sixth straight year above 8 percent, but many analysts say growth is starting to slow. Private spending is key in the equation, accounting for nearly 68 percent of gross domestic product.

"Consumption is slowing in the worst way, due to hefty prices rises rather than to an economic policy decision to manage demand pressures," said Rodrigo Alvarez, an economist at Ecolatina consulting group.

Detecting a slowdown in consumer spending is not easy because government figures are distorted by what economists, consumer groups and renegade state statisticians say is severely under-reported inflation.

Argentina's INDEC statistics agency reported 9.1 percent annual inflation through May, far below private estimates which are closer to 25 percent.

Such discrepancies mean supermarket and shopping-center sales figures are artificially inflated. The government reported last week that supermarket sales jumped by 32.6 percent in May from a year earlier, but Alvarez refuted that.

"INDEC says supermarket prices rose 4.6 percent (from May 2007) but our own studies show a rise of 32.8 percent," he said. "That means real sales grew 9.9 percent in May."

That is still higher than the pace of growth recorded in the first four months of the year, but Alvarez attributed this "blip" to shortages at small butchers' and vegetable shops, which forced people to spend in supermarkets.

PESSIMISM

Some analysts cite slower growth in value-added tax revenue, after inflation, as further evidence of a slowdown in consumer spending. Others are more cautious, predicting a slump in consumption levels in the coming months.

In the first quarter, government figures showed private consumption slowing slightly to 8.2 percent year-on-year, compared with a 9.0 percent average rise in 2007.

One possible explanation lies in the labor market. Job growth has cooled after ballooning during the initial rebound from a 2001-02 economic crisis, and real wages are suffering the effects of inflation.

"Initial evidence indicates that in the (second) quarter, there was not only a major brake on job growth but a contraction," Juan Luis Bour, an economist at FIEL consultancy, wrote in mid-June.

Expectations are also crucial. Argentines predict inflation will reach 30 percent in the next year, private surveys show, suggesting a widespread mistrust of government figures and price controls.

The farm dispute has stoked increasing pessimism, forcing the central bank to prop up the peso as investors seek safehaven dollars. Widespread street protests demanding a resolution to the conflict shook the country in mid-June.

Demonstrations abated after President Fernandez sent a bill to Congress to ratify the polemical sliding-scale tax regime her government imposed on grains exports in March. But a definitive solution is still elusive.

Some local economists see a bright side to slowed growth in consumer spending, saying it could help tame inflation. But others reject this notion, warning of eventual stagflation -- economic stagnation coupled with high inflation.

"While the conflict with the farmers may continue to generate headlines, we suspect that rising inflation is a far bigger problem," Morgan Stanley said in a report last week.