By Gabriel Burin
(Reuters) -Argentina's ongoing economic recovery will moderate to a normal pace in the run-up to October's mid-term legislative election, a Reuters poll showed.
At the start of 2025, Latin America's No. 3 economy behind Brazil and Mexico picked up strongly following a two-year recession that capped more than a decade of poor performance.
Consumption got a boost from a drastic fall in inflation thanks to President Javier Milei government's "chainsaw" drive that shored up fiscal results,
while facing intense social criticism.
But Argentines are cutting some spending and investment plans amid a slackening labor market, resurging currency worries and tighter credit conditions.
Gross domestic product (GDP) is set to expand at a still-decent 3.4% rate in 2026 from an expected 5.0% this year, according to the median estimate of 28 analysts polled between July 21-25.
Inflation is forecast to fall to 23% in 2026 from a projected 42% this year. In 2024, consumer prices shot up 237%, the worst since 1991 when Argentina was experiencing a similar economic shock.
"Growth stagnated in recent months as a result of flattening real wages, increased uncertainty and the slowdown in credit from a restrictive monetary policy," said Federico Filippini, head of research at Adcap.
"Next year's forecasts are heavily influenced by the upcoming election and the government's ability to advance its reform agenda."
Economic activity missed analyst calls in May on yearly terms and virtually stalled against April's levels, the latest data from a leading indicator showed.
Businesses are feeling the pinch of high interest rates from the adoption of a market-based money supply scheme in line with a $20 billion International Monetary Fund (IMF) program signed in April.
The implementation of the new framework also impacted local assets shaken by foreign exchange tensions caused by a drying up of U.S. dollar inflows from agricultural exports.
"Volatility will continue, but less than in recent weeks, with interest rates moving more freely and agricultural exports remaining low until year-end," said Fausto Spotorno, economist at Orlando Ferreres.
An expected $2 billion IMF disbursement should contribute to calm market anxiety before October's vote by bolstering Argentina's depleted international reserves.
Unable to tap global debt markets due to the country's steep risk premium, the government has received some additional relief through special bond sales as well as bank "repo" deals.
However, surging imports from Milei's economic opening keep the central bank's balance sheet under pressure, despite an increase in energy and mining exports.
To address the issue, many Peronists campaigning for the October election want to return to a policy mix of devaluation, protectionism and industrial promotion.
Voters rejected this approach at the ballot box in 2023, when Milei's La Libertad Avanza party won a presidential election vowing to trim the size of the state.
Now his LLA has an advantage in polls over the Peronists, whose internal rivalries flared up after their leader Cristina Fernandez de Kirchner was put under house arrest for corruption.
Investors hope Milei will push the "libertarian" agenda aggressively if his party wins more seats in Congress, recreating Argentina's economic transformation of the 1990s.
"We may see a re-discussion of reforms that were attempted during the current legislature but failed... for example, comprehensive labor and tax reforms, potentially also a pensions reform," Citi analysts wrote in a report.
"The new Congress could also give impulse to privatizations of some state companies that may require only a simple majority – Banco Nacion, (water utility) AySA and Aerolineas Argentinas."
(Other stories from the Reuters global economic poll)
(Reporting and polling by Gabriel Burin in Buenos Aires; editing by Ross Finley and Mark Heinrich)
