Argentina's economy is shrinking again a year before Javier Milei seeks re-election, as poverty climbs back above 30% and the country's borrowing costs jump.

Gross domestic product fell 0.6% in the second quarter from the previous three months, the first contraction in two years, national statistics agency Indec said in its preliminary estimate on September 17. A week later came a second blow, as its poverty report showed 32.3% of Argentines living below the poverty line in the first half of 2026, up from 28.2% in the previous six months. Markets delivered a third, with JPMorgan's country risk index for Argentina closing at 602 basis points on September 25, up 22% since the start of the month.

JPMorgan now expects a second consecutive quarterly contraction, which would put Argentina in technical recession. In a note to clients after Indec published July activity data, the bank cut its 2026 growth forecast to 1.5% from 2.7%, half the 3% touted by Economy Minister Luis Caputo. It forecast a 4% annualised contraction in the third quarter, equivalent to a fall of almost 1% on the previous three months.

The question for investors, and most crucially for the voters who will decide Milei's fate in October 2027, is whether the setbacks spell the end of the momentum that carried a self-described “anarcho-libertarian” to the presidency and through his first electoral test.

Milei's popularity was built on the impressive results of his chainsaw austerity: inflation has fallen from more than 200% when he took office in December 2023 to 33.5% in August, and poverty has dropped sharply from a peak of 52.9% in the first half of 2024. Both gains helped his newly founded party through the 2025 midterms. But the numbers voters feel most directly, jobs, wages and household debt, are now moving against him. And holders of Argentine sovereign debt fear that a politically weakened president would make it easier for a successor to unwind his fiscal and market overhaul, Bloomberg reported.

The government insists the slowdown is temporary. Output was still up 2% year on year in the second quarter, lifted by booming energy and farm exports, and Caputo said 13 of 16 sectors grew in the first half. Milei says his programme has lifted 14mn people out of poverty, and officials blamed part of July's slump on one-off shocks including gas shortages for industry, heavy snow and the football World Cup.

The president, meanwhile, remains unfazed. "If we keep doing things right, sooner or later things will start working well," he often says, and insists that staying the course is "non-negotiable." Caputo struck the same note with about 50 fund managers at JPMorgan's New York headquarters on September 21, telling them Argentina was in a "better situation" than when Milei was elected and that the government had "results to show.” He confirmed that monetary policy would stay tight and that the government was on course for both primary and financial surpluses.

July shock

Falling household spending drove the second-quarter contraction. Private consumption fell 2.4% on the quarter, public consumption 2.3% and investment 0.8%, while exports rose 2.5%. Investment has now fallen year on year for five consecutive quarters and was down 11.1% on a year earlier, Indec data show. That leaves gross fixed capital formation at 16.5% of GDP, about five percentage points below the level economists consider necessary for sustained growth, economist Fausto Spotorno told Ámbito.

The third quarter began worse. Indec's monthly economic activity estimator fell 2.9% month on month in July and 1.4% year on year, with retail and wholesale trade down 5.1% y/y and manufacturing down 4.6%, dragging activity back below its level of a year earlier. It was the steepest monthly fall since the Covid-19 pandemic lockdown of April 2020. Excluding 2020, the global financial crisis of late 2008 and the market turmoil of 2018-19, no month since 2004 had recorded a larger drop, JPMorgan said.

The bank had expected a decline of about 1%. Activity ended July 4.5% below its March peak, and cumulative growth for January to July slowed to 1.7% from 2.2% in the first half. JPMorgan urged caution about a volatile monthly series, noting that July had one fewer working day as well as the World Cup, gas outages and unusual weather. Its own seasonal adjustments nonetheless showed manufacturing down 3.6% on the month and construction down 4%, and early indicators suggested both remained weak in August. The bank judged the 5.5% monthly fall in retail disproportionate and possibly distorted by statistical effects.

August brought little relief. According to La Nacion, Analytica's leading index shows activity rebounding just 0.7% on the month, recovering only about a quarter of July's loss, and still 1.2% below a year earlier. Car and steel output improved, but consumption, credit and construction lagged. If September holds at August's level, the third quarter would shrink 2.5% on the second, the consultancy calculates, and only a monthly jump of more than 7% in September would avert a technical recession. Industrial production rose 0.3% y/y in August but was down 2.2% over the first eight months, according to OJF y Asociados.

The government, meanwhile, has cut its 2026 growth forecast to 3% from 5%. Economists polled by the central bank expect 2.1%, though leading consultancies are revising towards 1.8%, and the OECD trimmed its forecast to 2.6% on September 24.

The gap with official projections widens next year. The 2027 budget assumes 4% growth, 18% inflation and a 3.4% rise in private consumption. JPMorgan expects growth of 2.5%, driven by an 11% increase in exports, with private consumption up just 0.4%, while officials quoted by La Nacion privately concede that July's slump has left an unfavourable base for the third quarter.

Two-speed economy

JPMorgan's central concern is where growth will come from. Inflation eroded incomes in the first quarter and rising loan defaults choked credit. The bank expects both constraints to ease, but warns that export-oriented mining and energy, turbocharged by Milei's flagship incentive regime for large investments (RIGI), generate little activity at home. Growth prospects are likely to remain "highly uneven", it wrote, with sectors serving the domestic market lagging behind exporters.

Agriculture, energy and mining are growing, but together they account for only about a fifth of registered private salaried jobs. Retail, construction and manufacturing, which employ about half, are shedding workers. Registered private salaried employment has shrunk by about 246,300 jobs since just before Milei took office, according to Bloomberg. The number of active companies has fallen by more than 31,000, or 6.1%, to 481,015, a net loss of about 33 a day, according to figures cited by Ámbito. Pablo Lavigne, secretary of production co-ordination, has told business leaders that closures and bankruptcies are part of the "natural cost" of healthy growth, the newspaper reported.

Unemployment rose to 7.9% in the second quarter from 7.6% a year earlier, according to Indec's labour market survey, the highest rate since 2021. Informal work reached a record 45% of the employed, as people squeezed out of registered jobs turned to self-employment that pays about half as much. Without that growth in informal self-employment, unemployment would have reached 9.8%, C-P Consultora estimates.

"The biggest problem is job insecurity, not unemployment, because when families are deprived...they have to invent a job, which can be collecting waste, street vending, selling food at the train station," Eduardo Donza, a researcher at the Social Debt Observatory of the Catholic University of Argentina (UCA), told AFP. The observatory estimates that seven in 10 Argentines aged 18 to 25 cannot find regular employment with full rights.

Poverty turns up

Extreme poverty rose to 7.5% in the first half from 6.3%, and 44.5% of children aged 14 and under were poor, 10.8% extremely so, Indec said. Across the 31 urban areas surveyed, 9.7mn people were poor, which extrapolates to about 15mn nationally. Indec's total basic basket of goods and services rose 19.6% in the half-year, faster than consumer prices at 16.8%, as meat prices climbed. Average household income rose only about 12% over the same period, while the food basket rose 21.4%, according to consultancy Ecolatina.

The average poor household needed ARS1.44mn ($944) a month to cover the basket but brought in ARS922,755 ($605), leaving it 35.9% short, the report showed. Poverty remains far below its 2024 peak but has returned to roughly where it stood in the first half of 2025, at 31.6%. UCA researchers had already recorded a rise to 30% in the first quarter.

Still, relief may come in the second half. Ecolatina expects registered wages to rise 2.8% in real terms as inflation slows, though they would still average 2% below 2025 levels.

Revenue squeeze

The slowdown also threatens the fiscal surplus that underpins the programme. Tax revenue has fallen almost 4% in real terms this year, and VAT receipts 6.7%, as tax cuts compound weaker domestic demand. To hold the balance, the Treasury cut spending by 7% last month, taking the decline for the year to 2.5%, according to consultancy ACM. Critics warn of a vicious circle in which lower activity erodes revenue, forcing further cuts that deepen the downturn.

"The most pressing issue on Wall Street today is how to revive the economy," said Miguel Kiguel of Econviews, who sees the answer as critical to the ruling party's electoral chances, according to La Nacion. The available remedies, he warned, threaten one of the programme's two pillars, "fiscal balance or disinflation". JPMorgan expects fiscal and monetary policy to remain restrictive even as the election approaches.

Congress adds a further constraint. Milei lacks a majority in either chamber, and proposed cuts to disability spending in the 2027 budget drew opposition from allies in the PRO and the Radical Civic Union, as well as from lawmakers in his own La Libertad Avanza. The government has since signalled it will reverse them.

Strong peso, squeezed factories

Milei's drive to bring monthly inflation below 1% rests on a strong currency. The peso has lost only 3.7% against the dollar this year, far less than the rise in consumer prices, and the authorities have propped it up by intervening in bond and futures markets, Bloomberg reported. Capital controls on companies have not been lifted, and manufacturers and retailers are losing ground to cheap imports.

Buenos Aires Peronist Governor Axel Kicillof, Milei's most likely challenger, called the approach a "criminal, suicidal policy of deindustrialising the country" at an event in early September. Meanwhile, opposition lawmakers forced a session in Congress on household indebtedness after delinquency on household loans hit 12.9% in July, the highest in more than two decades.

Bonds sell off

Argentine dollar bonds issued under New York law fell by up to 4% in the five sessions to September 25. Country risk had dropped to 402 points in mid-July, its lowest since April 2018, before climbing back above 500 in August and past 600 last week.

Global markets have played a part. The yield on 30-year US Treasuries reached 5.9%, the highest since 2004, making emerging-market debt less attractive, Pablo Repetto, head of research at brokerage Aurum Valores, told the Buenos Aires Herald. He also pointed to pre-election uncertainty and to slower dollar purchases by the central bank, which averaged just $14mn a day in September against $137mn in May. For Repetto, 400 points was "quite low" and a spread of about 600 would not be illogical before an election.

The sell-off complicates the government's plan to return to international debt markets. Caputo argues that fiscal surpluses and falling inflation will eventually allow Argentina to borrow at sustainable rates and refinance its obligations. He told investors in New York that a much lower risk premium would be a precondition for any return next year, and that continued debt repayments would earn the market's confidence. Investors are already pricing in the election. Caputo himself pointed to a gap of almost 400 basis points between bonds maturing before the vote and similar securities due a year later.

Investors are less sanguine about the dollars needed to get there. Argentina's external obligations remain large relative to its reserves, and principal repayments to the IMF have resumed this month, adding to the pressure on the external accounts. Heavier payments could force the government to accelerate dollar purchases, seek fresh financing or adjust policy. Caputo has said that if Argentina cannot refinance its domestic debt, it could draw on its currency swap with China and a still-active arrangement with the US Treasury. Critics counter that adjustment without growth, investment or reserve accumulation leaves the economy exposed to external shocks.

Patience runs out

Only 38% of Argentines approve of Milei and 58% disapprove, according to AtlasIntel's latest survey, cited by Bloomberg, in which seven in 10 respondents rated the job market as bad. Inflation no longer tops voters' concerns. An AtlasIntel poll in August found corruption and unemployment now rank higher. In a QSocial poll in August, half of Argentines said they could no longer wait for his policies to improve their finances. Even 2% growth would be too weak to shift expectations, economist Enrique Szewach told Ámbito.

Yet the left-populist Peronist opposition, which champions a large state role in the economy and generous subsidies, has so far failed to turn discontent into a credible challenge. Kicillof says he is working to defeat Milei in 2027 and told tens of thousands of supporters in Avellaneda that the president "is not bringing order to Argentina. He is tearing it apart.” He has not declared his candidacy, however, telling the crowd that "this is a year for building, not for candidacies". Peronism is still struggling to unite behind a leader while former president Cristina Fernández de Kirchner, its dominant figure for two decades, serves a six-year corruption sentence under house arrest. Many voters also still associate Kirchnerism with years of failure to improve their lot, and that record remains one of Milei's strongest assets despite the latest setbacks.

A second is Washington, where Donald Trump has made no secret of his ideological affinity with Milei, and whose Treasury extended a $20bn currency swap line in October 2025 to shore up the peso before the midterms, which the right-wing libertarian party went on to win comfortably. The US now plans up to $7bn in financing for Argentine energy and critical-minerals projects in 2027, through the Export-Import Bank and the Development Finance Corporation, with the $51bn Argentina LNG project led by YPF, Eni and XRG as its flagship. Such projects will lift exports and dollar inflows, but they will do little for jobs before the vote.

The balance of indicators has nonetheless turned. Household loan arrears are at a two-decade high as the informal economy swells, the central bank is buying fewer dollars to rebuild reserves of $49.7bn, and the OECD and JPMorgan have joined the government in cutting growth forecasts. Inflation is easing again, with monthly price growth slowing to 1.7% in August, the lowest since June 2025, but at 33.5% it remains far above the 10% the government had forecast for this year and has slipped down voters' list of worries. Milei's 2027 budget bets on a rebound in growth that the latest data have yet to show.

MAP LATAM, a consultancy, assigns a 60% probability to a baseline of low growth, gradual disinflation and a contained exchange rate, Ambito reported. "An economy that is not enough to secure a victory for the government," it concluded, "but neither would it alone explain a potential defeat."