INFORME ECONÓMICO DE ARGENTINA | Growth returns despite poor labor market

The economic recovery is firming up, with recently released data showing that GDP expanded on an annual basis in Q1 after three quarters of sizeable drops. The expansion was underpinned by a turnaround in private consumption—despite rising unemployment—and fixed investment. The latest economic indicators tend to corroborate this brighter picture; economic activity expanded again in April and exports continued to rise in May, albeit modestly, while industrial production rebounded vigorously in the same month, on the back of strong external demand for food products and a jump in output in the automobile industry. However, households maintain a wait-and-see approach amid a slower-than-desired economic rebound, as signaled by June’s disappointing consumer confidence figure. In a bid to reaffirm the country’s rehabilitation in the financial markets, the government sold USD-denominated 2.75 billion of 100-year bonds in June. The government has affirmed it is on course to meet its fiscal targets, although the fiscal deficit in H1 was amply financed by a sustained expansion in the monetary base.

The economy is set to rebound this year. Still low interest rates across the globe and high domestic rates will attract foreign capital, which, together with higher public infrastructure spending, will spur investment. Moreover, households will reap the benefits of falling inflation, while a weakening peso should support exports. Analysts foresee the economy expanding 2.6% this year, unchanged from last month’s forecast, and 2.7% in 2018. (see details on page 19)

BRAZIL | Politics threatens to disrupt economic recovery

The political scene has gone from bad to worse in recent weeks, jeopardizing the economy’s recovery. The attorney general charged President Michel Temer with accepting millions of dollars in bribes on 26 June, making him the first sitting leader in Brazil’s history to face criminal charges. The move was the latest in a lengthy inquiry that has seen dozen of politicians, including cabinet members, placed under investigation or charged for corruption. While at this point, it seems unlikely that Temer will be found guilty—two-thirds of the Lower House of Congress must vote in favor of a trial for the case to move to the supreme court—the accusations have further dented Temer’s already abysmal popularity and are threatening his economic reforms. On 30 June, a nationwide protest was held against labor and pension reforms. The political unrest dampened both consumer and business confidence in June, although less-recent hard data suggests that a moderate recovery is underway. Industrial production expanded for a second consecutive month in April and the unemployment rate fell in May.

The political turbulence caused a second consecutive downgrade to Brazil’s outlook this month. The FocusEconomics panel sees GDP expanding a meagre 0.4% in 2017, which is down 0.1 percentage points from last month’s forecast. The recovery is seen gaining speed in 2018 and GDP should increase 2.0%.

The economic recovery is firming up, with recently released data showing that GDP expanded on an annual basis in Q1 after three quarters of sizeable drops. The expansion was underpinned by a turnaround in private consumption—despite rising unemployment—and fixed investment. The latest economic indicators tend to corroborate this brighter picture; economic activity expanded again in April and exports continued to rise in May, albeit modestly, while industrial production rebounded vigorously in the same month, on the back of strong external demand for food products and a jump in output in the automobile industry. However, households maintain a wait-and-see approach amid a slower-than-desired economic rebound, as signaled by June’s disappointing consumer confidence figure. In a bid to reaffirm the country’s rehabilitation in the financial markets, the government sold USD-denominated 2.75 billion of 100-year bonds in June. The government has affirmed it is on course to meet its fiscal targets, although the fiscal deficit in H1 was amply financed by a sustained expansion in the monetary base.

The economy is set to rebound this year. Still low interest rates across the globe and high domestic rates will attract foreign capital, which, together with higher public infrastructure spending, will spur investment. Moreover, households will reap the benefits of falling inflation, while a weakening peso should support exports. Analysts foresee the economy expanding 2.6% this year, unchanged from last month’s forecast, and 2.7% in 2018.

Inflation in the city of Buenos Aires fell to 25.4% in May (April: 29.4%). The Central Bank kept the 7-day repo rate unchanged at 26.25% at its 27 June meeting, maintaining a clear anti-inflationary stance in order to curb higher-than-desired inflation. Panelists expect inflation to end 2017 at 22.2% and 2018 at 15.1%.

REAL SECTOR | Argentinian economy returns to growth in Q1, leaving behind the ghosts of the recession

Argentina’s economy seems to have turned a corner, registering a 0.3% annual expansion in Q1. Although this only represents tepid growth, it is a significant turnaround from Q4’s 1.9% fall and marks the first quarter of year-on-year growth after three consecutive quarters of notable drops. While the Q1 print is undeniably good news, it will be hard to meet the 3.5% annual growth target included in the government’s 2017 budget. The economy is still struggling to fully adapt to some necessary yet painful measures passed by the current administration, such as scrapping energy subsidies and public spending cuts. Side effects of these measures prompted inflation to skyrocket and served to weaken the economy last year. The reading is nevertheless a clear sign that the Macri administration’s efforts to tackle problems built up over the previous decade through measures such as tax cuts, deregulation and the elimination of currency controls for sectors such as agriculture and banking, are bearing fruits.

Strengthening domestic demand was one key factor behind the first quarter result. Despite stubbornly-high inflation, which came on the back of higher regulated prices, and rising unemployment in the first quarter, private consumption swung from a 2.4% year-on-year contraction in Q4 to a 0.9% expansion in Q1. This bodes especially well for household spending in the following quarters, as inflation has already begun to drop substantially and the notable wage increases, which will most likely result from oncoming paritarias (annual collective bargaining agreements), will sustain real wage purchasing power. The persistently high-interest-rate environment does not seem to have taken too high a toll on fixed investment, which instead likely benefited from Macri’s market-friendly economic reform plan to reignite investors’ interest in Argentina. After plunging 5.9% in Q4, fixed investment swung to a respectable 3.0% expansion in Q1; it was also fueled by the government’s infrastructure investment plan. Lastly, the government’s focus on reducing the fiscal deficit doesn’t appear to have negatively affected public spending, as government consumption swung from a 2.0% contraction in Q4 to a 1.0% expansion in Q1. The result is the largest increase in one year and was likely fueled by the approaching of next October’s parliamentary elections.

While the domestic economy is reporting positive numbers, the external sector showed some weakness. Depressed by a stronger peso and by the difficult economic situation of Brazil, its main export destination, exports dropped 1.8% in the first quarter (Q4 2016: +7.7% year-on-year). On the other hand, due to the recovering domestic demand, imports registered a stronger expansion than in the previous quarter (Q1: +4.3% yoy; Q4 2016: +3.5% yoy). Consequently, the external sector’s contribution to growth swung from plus 0.9 percentage points in Q4 to minus 1.4 percentage points in Q1, the weakest reading in three quarters.

On a sequential basis, the economy grew 1.1% compared to the previous quarter, the third consecutive quarter of growth as well as the highest reading since Q2 2015 (Q4 2016: +0.7% quarter-on-quarter). This has made chances of another technical recession less likely and bodes well for Macri’s approval ratings ahead of October’s parliamentary elections. The economy is expected to accelerate in the upcoming quarters and should return to growth in 2017. The expansion should come on the back of a solid recovery in the agricultural, construction, financial and food processing sectors, which will spur fixed investment, while declining inflation, rising wages and a more upbeat consumer sentiment are expected to underpin household spending).

Our panelists expect the economy to grow 2.6% this year, which is unchanged from last month’s forecast. For 2018, panelists expect the economy to expand 2.7%.

REAL SECTOR | Economic activity continues to expand in April

In April, the monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) rose 0.6% year-on-year, below March’s revised 1.3% expansion (previously reported: +0.8% yoy). The construction, fishing, restaurants and hotels and agricultural sectors recorded the strongest annual improvements. In contrast, the mining and quarrying and electricity, gas and water sectors posted the largest year-on-year contractions.

Sequential data was flat. A month-on-month comparison showed that economic activity remained unchanged in seasonally-adjusted terms in April from the previous month, following March’s revised 1.5% increase (previously reported: +1.9% seasonally-adjusted month-on-month).

On average, economic activity decreased 1.9% in the 12 months up to April, which is an improvement from the 2.2% drop in the 12 months up to March.

REAL SECTOR | Industrial production rebounds vigorously in May

In May, industrial production jumped 2.7% over the same month last year, according to the latest data released by the National Statistical Institute (INDEC). The reading strongly contrasted the 2.6% fall observed in the previous month and marked the highest reading in almost two years. Nevertheless, it undershot the 3.5% expansion that market analysts had expected. May’s expansion put an end to fifteen consecutive monthly declines in industrial production.

According to INDEC, May’s healthy growth mainly came on the back of expansions in the food, automobile, chemical, metallurgic and basic metals industries and higher production of non-metallic minerals and rubber and plastic. On the other hand, the textile, oil and paper industries declined in annual terms. The expansion in the food industry was driven by a double-digit jump in beef production, which largely benefited from strong external demand. Both the metallurgic and non-metallic minerals industries benefited from expanding activity, while rising agricultural production drove the production of agricultural machinery, further supporting the metallurgic industry. Lastly, the automobile industry grew by almost a fifth compared to the same month of last year, mainly thanks to a sharp increase in the production of light commercial vehicles.

The accumulative average variation in industrial production in the first five months of the year was minus 1.4%, a considerably smaller decline than the 2.5% accumulative average contraction recorded in the first four months of the year.

Panelists participating in the LatinFocus Consensus Forecast expect that industrial production will expand 1.7% in 2017, which is unchanged from last month’s forecast. For 2018, the panel expects industrial output to rise 2.4%.

OUTLOOK | Consumer sentiment worsens considerably in June

In June, the Universidad Torcuato di Tella (UTDT) consumer confidence index fell from May’s 45.8 to 42.0. The index is now even further below the 50-point threshold that separates pessimistic from optimistic sentiment. Consumer confidence has been negatively affected by the Macri Administration’s reforms, which, in order to fix the numerous imbalances stemming from the previous administration’s economic policies and give the country a more stable policy framework, have resulted in job cuts and a high rate of inflation. Latest available data shows that unemployment rose significantly in Q1 2017. Moreover, the tightening stance the Central Bank is maintaining may have weakened consumer sentiment further, as it signals that authorities are facing difficulties in keeping prices under control.

In June, consumers were far more pessimistic about their current financial situations than they were last month and they were less willing to make major purchases, which doesn’t bode well for private consumption. Moreover, both their assessments of their personal situation compared to one year ago and their outlook regarding their future financial situation deteriorated considerably. In addition, households’ assessments of both the country’s short- and long- term macroeconomic prospects weakened substantially, probably influenced by the slower-than-expected improvement in the economy.

Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 2.3% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, panelists expect private consumption to increase 2.6%.

MONETARY SECTOR | Inflation slows down considerably in May but still exceeds the Central Bank’s target

According to the National Statistics Institute (INDEC), consumer prices in the Greater Buenos Aires capital area rose 1.3% in May from the previous month, half April’s 2.6% increase and below market expectations of a 1.7% rise. The print mainly reflected higher prices for food and beverages, housing and basic services and home equipment and maintenance.

INDEC released inflation figures for Greater Buenos Aires for the first time in April, as it had collected twelve consecutive CPI readings and thus had the necessary base of comparison. Inflation in May came in at 24.0%, significantly below April’s 27.5% but still well above the Central Bank’s 12.0%-17.0% target for this year. May’s figure comes after the Central Bank of Argentina decided to keep the 7-day Repo Reference Rate unchanged at 26.25% at its 23 May meeting, sticking to a tight monetary stance.

The latest data compiled by the Statistical Institute of the City of Buenos Aires show that inflation slowed from 29.4% in April to 25.4% in May, the lowest reading since November 2015. Inflation came mainly on the back of higher prices for housing, water, electricity, food and non-alcoholic beverages, recreation and culture and clothing and footwear. The different inflation data released by the Statistical Institute of the City of Buenos Aires and by INDEC are not comparable, as the two index structures are not homogeneous. This is due to different baskets of goods, samples and data collection methodologies.

Panelists surveyed for this month’s LatinFocus report expect inflation in the Buenos Aires province to be 22.2% at the end of 2017, which is unchanged from last month’s estimate. Panelists estimate that inflation will end 2018 at 15.1%.

EXTERNAL SECTOR | Export growth continues to soften in May

In May, exports expanded a meager 0.8% from the same month last year, which followed April’s revised 1.8% increase (previously reported: +1.7 year-on-year). Exports grew on the back of higher prices, despite a reduction in overall export volumes. As for the different product categories, exports industrial manufactures and fuels and energy grew, more than offsetting a drop in exports of agricultural manufactures and primary products. As for the main export markets, exports to the MERCOSUR countries expanded healthily, while exports to the European Union, NAFTA, China, Chile, Maghreb and Egypt fell. On a monthly basis, exports grew 1.7% in seasonally adjusted terms in May, strongly contrasting the revised 4.4% contraction in April (previously reported: -6.8% year-on-year).

Imports jumped 24.0% annually in May, above April’s 13.8% expansion. The trade balance therefore worsened from a USD 485 million surplus in May 2016 to a USD 642 million deficit in May 2017. In the 12 months up to May, the trade balance posted an accumulated shortfall of USD 0.3 billion, which contrasted the USD 0.9 billion surplus recorded in the 12 months till April.

Panelists participating in the LatinFocus Consensus Forecast expect exports to expand 4.1% in 2017 and they see imports increasing 9.5%, thus pushing the trade balance to a USD 0.8 billion deficit. For 2018, the panel expects exports to increase 6.2% and imports to expand 7.4%, and expects the trade balance to record a USD 1.6 billion shortfall.

Este es un informe de FocusEconomics enviado especialmente. www.focus-economics.com Desde Barcelona -España.