Milei’s chainsaw has jammed

For over a decade, the Argentine economy has been plagued by high inflation and recurring devaluations of its currency. This has meant that economic activity has remained stagnant and that, against a backdrop of population growth, per capita income has fallen by around 10 per cent. For this reason, any assessment of the progress of President Javier Milei’s plan must begin with the external and inflationary fronts – the two main obstacles – because until these are resolved, it will not be possible to improve the rest of the economy.

Performance on the external front has been exceptional, whichever way you look at it. The trade balance recorded its highest surplus in recent history, driven by an excellent oilseed crop season but, above all, by a marked improvement in the energy sector, which benefited from the sharp rise in international oil prices. This generated a large foreign exchange surplus on the foreign exchange market, enabling the Central Bank to make record foreign currency purchases, totalling approximately 13 billion dollars. These purchases were crucial for meeting external debt payments and strengthening the monetary authority’s balance sheet, as well as for dispelling any risk of a run on the dollar. This was decisive, for example, in ensuring that this time round the FIFA World Cup – which usually triggers a significant rise in demand for dollars – had no impact whatsoever, unlike what happened in 2022.

All this has only been possible thanks to the government’s change of course, given that last year it had explicitly ruled out the possibility of the Central Bank intervening in the foreign exchange market to accumulate foreign currency. A decision that was heavily criticised by the vast majority of economic analysts. The accumulation of reserves is a key factor in the sustainability of the exchange rate and one of the main indicators monitored by international markets when assessing countries’ ability to pay.

Linked to the previous result is the second piece of positive data: inflation. In June, it recorded a monthly rise to 2.1 per cent, following three consecutive months of decline. Inflation is currently higher than it was a year ago. Meanwhile, there has been a succession of sharp rises in key prices: first the dollar during the mid-term elections in October 2025, then meat towards the end of last year and, finally, fuel in the early months of 2026. These movements explain this trend. However, once these three driving factors have subsided, inflation is expected to continue to fall in the coming months.

Furthermore, by broadening the scope of the analysis, the current figure takes on even greater significance. Over the last eight years – a total of 96 months – inflation has been below 2 per cent per month in only 7 per cent of cases. What is more, four of these eight months occurred during the current government’s term. That said, inflation remains rather high compared with regional benchmarks: by way of reference, in recent months the average monthly inflation rate in Brazil, Chile and Uruguay has been 0.5 per cent. However, reaching these levels will take a long time, given Argentina’s high starting point for inflation.

At best, economic activity is in a phase of stagnation. The main difference compared with last year, when the economy was growing, was the slowdown in bank lending. This was caused by interest rates rising to record levels during the second half of last year, against the backdrop of the mid-term elections. This rise could have been curbed by the Central Bank, but the monetary authority decided not to intervene, following the libertarian principle of non-interference in the markets. In addition to stagnation, the picture is extremely mixed. Looking at Milei’s entire term in office, the export-oriented sectors – agriculture and livestock, mining and energy – together with the banking sector, have been the big winners and the main drivers of economic activity. Conversely, the sectors linked to domestic activity – industry, trade and construction – have been the big losers.

The problem, as we shall see below, is that this diversity has had negative effects on both employment and wages. Export-oriented sectors have been crucial in generating foreign currency, but they employ few workers – exactly the opposite of what happens in manufacturing, construction and the retail sector.

The slowdown in economic activity has not had a significant impact on unemployment. In the first quarter – the latest official data available – the rate stood at 7.8 per cent: an increase of 0.3 percentage points compared with the previous quarter, when it had been 7.5 per cent. A clear effect was, however, observed on informal employment, which rose by 1.2 percentage points to reach 44.2 per cent. In fact, there has been a very significant reduction in the number of people employed in formal jobs – nearly 200,000 fewer – which has been virtually offset by an increase in informal jobs, amounting to around 147,000. This difference explains the moderate rise in unemployment.

This is where the heterogeneity of economic activity mentioned earlier becomes significant: the sectors hardest hit were, of course, those in which the greatest number of jobs were lost. Industry and commerce together account for half of the decline in formal employment. Although it is worth noting that, despite the contraction in economic activity, unemployment has remained virtually unchanged, there is no doubt that the labour market has deteriorated. Informal jobs, as well as not being protected by the rights and benefits of regular employment, are more precarious and provide lower average incomes than those in the formal sector.

With business activity declining slightly and an increase in lower-paid jobs, people’s incomes have also fallen. Added to this is the rise in public service tariffs above the rate of inflation, as part of a policy of tariff updates and adjustments. It should be noted that these tariffs include a subsidised component, supported by the government, and therefore constitute a significant part of public expenditure.

This phenomenon can be observed by analysing real and disposable income between 2023 and May 2026, the latest data available. Real income indicates how much people can afford to buy once the effect of inflation has been factored in. Disposable income also takes fixed expenses into account: this is where utility bills come into play. This second measure aims to provide a more accurate estimate of how much actually remains in people’s pockets for consumption. Since the start of the year, real income has fallen by 1.4 per cent. As the government continues to update tariffs, real disposable income has fallen even further, by 2.8 per cent. Compared with 2023, the two indicators are 10 per cent and 16.5 per cent lower respectively.

This comparison requires some clarification. In 2023, utility charges were significantly behind schedule. Public services and transport were very cheap, so disposable income at that time was bolstered by subsidies. The adjustment was necessary to reduce the deficit. However, the fact that the adjustment was necessary does not mean that it did not affect purchasing power. A household that today spends a larger proportion of its income on electricity, gas and transport has less money available for other forms of consumption. Both things can be true at the same time: rates were out of step with inflation, and bringing them up to date reduced disposable income, affecting economic activity through a contraction in consumption.

The adjustment of tariffs, however, was not the only problem. Even setting this effect aside and looking solely at real income, it is clear that it has been falling since August last year and that this decline is linked, at least in part, to the acceleration in inflation described above. Should the downward trend in inflation continue, it is reasonable to expect that incomes will begin to recover, albeit gradually.

The most worrying and unprecedented figure in recent months is the sharp rise in household insolvencies, which have more than doubled compared with previous peak levels. The rate had reached 5 per cent both during the 2019 debt crisis, under the Macri government, and in 2021 during the pandemic. It currently stands at 13 per cent of total loans granted and affects 27 per cent of people with an outstanding loan. The very sharp rise in lending observed between 2024 and mid-2025, combined with the subsequent rise in interest rates to record levels and, subsequently, a fall in incomes, has created the perfect storm that explains this sharp surge in defaults.

What we are seeing, therefore, is not merely an incomplete recovery, but a two-speed economy. The sectors that generate foreign currency are showing positive results, whilst industry, construction and trade continue to weaken. This difference is not insignificant: the former are crucial for sustaining the external front, whilst the latter account for a significant proportion of employment and household income. For this reason, the problem cannot be solved by simply waiting for growth in some sectors to eventually spill over into others.

Should this heterogeneity become entrenched, currency stability could coexist for a long time with informality, low wages and stagnant consumption. This is not to deny the progress made by the government, but to put it into the right perspective: stabilisation was a necessary condition for growth, but it was never sufficient. The second half of Milei’s programme will be far more challenging than the first. It is no longer enough simply to bring order to the macroeconomic variables: the challenge now is to translate that order into higher output, better jobs and a genuine recovery in purchasing power.