Recent data from the real sector is positive, with economic activity expanding in December and industrial production rebounding in January, there is growing evidence that imbalances are building. In January, a surge in capital goods imports caused the trade deficit to widen further, and the fiscal deficit grew considerably on increased interest payments. Prospects of growing current account and fiscal deficits are worrying, as they could derail ongoing efforts by President Macri to reform the economy. These two deficits, together with untamed inflation, pose a major immediate challenge to the government. Salary negotiations between the government and labor unions are currently underway, and demands to equate salary increases to rises in the inflation rate would inevitably increase fiscal spending and keep the budget deficit elevated, forcing the government to continue seeking external financing.
The economy is expected to grow at a solid pace this year and next thanks to resilient growth in fixed investment and private consumption. However, a weaker currency and high inflation will weigh on private consumption, whereas the growing twin deficits pose a major downside risk to growth.
FocusEconomics panelists see the economy expanding 2.8% in 2018, which is down 0.2 percentage points from last month’s forecast. For 2019, growth is expected to reach 3.1%.
National inflation edged up from 24.8% in December to 25.0% in January. It is expected that inflation will moderate slowly going forward but should remain elevated, as recent hikes in energy and transport prices will exert upward price pressure. Panelists expect inflation in the whole country to end 2018 at 19.8%. For 2019, inflation is set to moderate to 13.7%. REAL SECTOR | Economic activity decelerates in December
The monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) lost steam in December; growth in economic activity slowed from 3.9% in November to 2.0%. This marked the tenth consecutive month of expansion, albeit at the slowest rate since April 2017.
December’s reading reflected slowdowns in almost all components of the index. Year-on-year growth in manufacturing activity moderated from a 3.7% expansion in November to 0.2% in December. Growth in financial intermediation more than halved, from 7.7% to 3.1%, and construction activity
moderated from 16.6% in November to 12.2% in December.
A seasonally-adjusted month-on-month comparison showed that economic activity accelerated from a 0.3% increase in November to 0.6% growth in December. Lastly, economic activity in the 12 months up to December jumped to 2.6% on average, up from 2.2% in the 12 months up to November. Our panelists expect the economy to grow 2.8% in 2018, which is down 0.2 percentage points from last month’s forecast. For 2019, panelists expect the economy to expand 3.1%.
REAL SECTOR | Growth in industrial output jumps in January In January, industrial production expanded 2.6% over the same month in the previous year, according to the latest data released by the National Statistical
Institute (INDEC). The reading marked a sharp acceleration from the 0.3% year-on-year growth observed in December, and the ninth consecutive expansion in industrial output.
January’s upturn in industrial output was driven by sharper expansions in the production of non-metallic mineral products and chemical products and substances. Softer contractions in the food and automotive industries also contributed to the strong reading in the month.
The increase in January suggests that Argentina’s industrial sector is entrenched on a solid recovery path. It is set to expand at a solid pace in 2018.
Panelists participating in the LatinFocus Consensus Forecast expect that industrial production will expand 2.4% in 2018, which is down 0.3 percentage points from last month’s forecast. For 2019, the panel expects industrial output to rise to 2.7%. OUTLOOK | Consumer sentiment worsens in February
The Universidad Torcuato di Tella (UTDT) consumer confidence index dropped from 45.2 points in January to 43.8 points in February. The index dipped further below the 50-point threshold that separates pessimistic from optimistic sentiment among consumers, where it has been almost uninterruptedly since January 2016.
The decline reflected consumers’ more pessimistic views towards most components of the index. The short- and long-term macroeconomic outlooks were perceived more negatively in February, although they remained above the 50-point mark, while the view of personal financial situations for
the upcoming year deteriorated sharply. In turn, willingness to make major purchases was the only component that improved in the surveyed time, albeit from a very low base.
Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 2.8% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, panelists expect private consumption to increase 3.1%.
MONETARY SECTOR | Inflation continues rising in January According to the National Statistics Institute (INDEC), national consumer prices rose 1.8% over the previous month in January, coming in below December’s 3.1% rise. The result reflected higher prices in 11 of the 12 components of the
index. Transportation, recreation and culture, restaurant and hotels were the components that increased the most, while clothing and footwear was the only subcomponent that declined. Core consumer prices, which exclude volatile and non-regulated products, also rose 1.8% month-on-month (December: +1.7% month-on-month). National inflation as measured by INDEC increased from 24.8% in December to 25.0% in January. The latest data compiled by the Statistical Institute of the city of Buenos Aires showed that consumer prices in the city of Buenos Aires moderated from
a 3.3% month-on-month increase in December to a 1.6% rise in January. The year-on-year variation in consumer prices moderated from 26.1% in December to 25.8% in January. The inflation data released by the Statistical Institute of the city of Buenos Aires and INDEC are not comparable, as the two index structures are not homologous. This is due to different baskets of goods, samples and data collection methodologies.
Inflation in February is expected to remain elevated, as additional increases in the prices of electricity, transportation, communication and medicine came into effect on 1 February. These recent cuts in subsidies were part of government efforts to slash elevated public spending and rein in the fiscal deficit. Persistently high inflation as the government must accumulate more external debt to finance elevated public expenditure. This in turn is keeping the fiscal deficit elevated. While external debt levels are considered to be on a sustainable footing, the increased likelihood that the U.S. Federal Reserve will raise interest rates at a faster-than-expected rate this year could substantially
bump up Argentina’s debt burden and increase the economy’s exposure to external shocks.
Stubbornly-high inflation is a persistent problem for the government since it will have to continue accumulating external debt to finance the fiscal deficit in order to meet its objective of trimming elevated public spending. The Central Bank’s decision to ease its inflation target for 2018 and 2019 implies that short- and mid-term estimates of government spending, earnings and the fiscal
deficit are putting at risk the health of public finances and the government’s fiscal consolidation efforts. Panelists surveyed for this month’s LatinFocus report expect inflation in the city of Buenos Aires to be 19.7% at the end of 2018, which is up 0.6 percentage points from last month’s estimate. Panelists estimate that inflation will end 2019 at 13.6%. National inflation is expected to be 19.8% at the end of the year 2018, which is up 0.5 percentage points from last month’s forecast. Inflation is expected to reach 13.7% at the end of 2019.
EXTERNAL SECTOR | Trade deficit widens in January In January, exports expanded 10.7% in year-on-year terms, contrasting the 2.4% contraction observed in December. January’s double-digit expansion was driven by a broad-based increase across categories. In annual terms, exports of primary products expanded 12.4%, industrial manufacturing goods 29.6%, and fuel and energy 63.2%. In contrast, manufactured agricultural products component was the only subcategory of exports that declined in the surveyed month. In dollar terms, exports reached USD 4.8 billion in January, up from previous month’s USD 4.5 billion, as well as the USD 4.3 billion recorded in the corresponding month of 2017. Growth in imports jumped from a 16.7% annual expansion in December to 32.1% in January. The sharp increase was driven by double-digit expansions
in all components of the index. Year-on-year growth in imports of intermediary goods reached 32.6%, and of capital goods 29.5%.
The trade deficit widened from December’s USD 847 million to USD 986 million in January (January 2017: USD 51.0 million deficit). January’s figure marked the thirteenth consecutive month that the trade balance was in the red. The widening trade deficit is becoming a major source of concern, because it will likely cause the current account deficit to expand, exposing the country to
external shocks at a moment when the government is borrowing heavily from foreign sources to keep up with elevated public spending. Panelists participating in the LatinFocus Consensus Forecast expect exports to expand 6.5% in 2018 and imports to increase 9.0%, pushing the trade
balance to a USD 10.7 billion deficit. For 2019, the panel expects exports to increase 6.4% and imports to expand 7.2%, with a trade shortfall of USD 12.0 billion.
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