Argentina's economy experienced its first quarterly contraction in two years during the second quarter of 2026, marking a significant setback for President Javier Milei's administration. This economic slowdown is complicating Milei's efforts to revive the economy and presents a challenge to his re-election prospects, especially given economists have cut their growth forecasts for this year to 2.7% from 3.5% in December, a substantial drop from the government's initial projection of 5%.
The initial austerity measures implemented by Milei's government successfully curbed inflation and stabilized the economy, a feat even acknowledged by the International Monetary Fund. However, the subsequent phase, aimed at fostering robust recovery, is proving more difficult. The Central Bank's survey of economists indicated a likely 0.4% contraction in the second quarter, a full percentage point downward revision from the previous survey. Economic activity has only expanded 1.9% through June, significantly lower than the 6.1% pace a year prior.
Several factors contribute to the stalling recovery, including the government's decision to maintain a tight policy stance by not borrowing abroad, leading to stagnation according to Bárbara Guerezta of Latin Securities Argentina. Additionally, Milei's strong peso policy, intended to tame inflation, is making domestic producers less competitive and imports cheaper, hindering growth in sectors like manufacturing, construction, and commerce. These labor-intensive sectors are weakening, while mining, energy, and agriculture, fueled by Vaca Muerta shale, lithium deposits, and a strong farm sector, are providing most of the economic momentum. The real effective exchange rate is considered too strong for the current policy mix by analysts like Ivan Stambulsky of Barclays.
The economic downturn is particularly impacting small and medium-sized businesses, which are major employers in Argentina. Miguel Jacobawsky, owner of a plastics packaging maker, noted that his plant operates at less than two-thirds capacity due to inconsistent sales and rising overhead costs that cannot be fully passed on to customers. This weakness in the SME sector could erode Milei's support for the 2027 elections. Public opinion polls reflect this concern, with Milei's approval rating at 37.1% in July, near its lowest point, according to an AtlasIntel poll conducted for Bloomberg News.
