Recently released data shows that the financial storm that hit the country in the second quarter, coupled with a prolonged drought, took a heavy toll on the economy. Economic activity contracted sharply in May, after a small drop in April, dragged down by plunging agricultural output. This also affected the labor market, which saw the number of employees fall in April–May, and weighed heavily on consumer confidence in Q2. In an effort to reduce the fiscal deficit—one of the goals of the stand-by arrangement reached with the IMF in June—the government announced it will gradually raise public transport tariffs in the Buenos Aires metropolitan area. Moreover, the federal housing plan will be discontinued, and capital spending will be cut. Despite a healthy first quarter, the pace of growth is expected to slow sharply this year. The loss of agricultural output following the severe drought; extremely high interest rates and currency volatility, which will weigh on investment decisions; and consumer spending constrained by low confidence and rapid inflation are seen driving this deceleration. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 0.4% in 2018, down 0.5 percentage points from last month’s forecast. For 2019, growth is expected to reach 1.9%. National inflation rose from 26.3% in May to 29.5% in June, on exchange rate pass-through pressures. A weakening currency and planned cuts to public subsidies will drive prices up going forward. Panelists expect national inflation to end 2018 at 30.4%, up 0.8 percentage points from last month, and 2019 at 20.2%. At its latest meeting held on 10 July, the Central Bank left the seven-day repo reference rate unchanged at an all-time-high of 40.00%. Strong price pressures and the Bank’s continued attempts to restore market confidence by supporting the currency drove the decision. In the months ahead borrowing rates should decline, although persistent price pressures will limit the extent of the loosening. On average, panelists participating in the LatinFocus Consensus Forecast see the seven-day repo repurchase rate ending 2018 at 35.51% and 2019 at 25.93%. On 3 August, the Argentine peso traded at 27.29 ARS per USD, a strengthening of 2.5% month-on-month. After a prolonged period of considerable currency weakening, the appreciation was triggered by investors lightening their USD portfolios as the Central Bank announced it will monitor growth in monetary aggregates more closely. Panelists participating in the LatinFocus Consensus Forecast foresee the peso weakening to 30.19 ARS per USD in 2018 and 34.78 ARS per USD at the end of 2019.
REAL SECTOR | Economic activity growth plummets to a near nine-year low in May The monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) contracted 5.8% in annual terms in May, which was below the revised 0.6% fall recorded in April (previously reported: -0.9% yearon-year) and marked the worst performance in nearly nine years. The contraction came on the back of a significant decline in agriculture, livestock, hunting and forestry activity, which plunged 35.2% in May (April: -30.3% yoy; previously reported: -30.8% yoy). The sector has been hit hard in recent months by the effects of the drought on crop yields. In addition, growth in the manufacturing industry fell 1.4% in May (April: +2.8% yoy; previously reported: +3.1% yoy), and construction activity growth slowed to 4.4% (April: +10.3% yoy; previously reported: +10.2% yoy). Meanwhile, activity in the financial intermediation sector accelerated to 10.8% growth in May (April: +8.4% yoy; previously reported: +9.4% yoy). A seasonally-adjusted month-on-month comparison shows that economic activity contracted 1.4% in May following April’s 2.8% drop. Lastly, average economic activity decreased to 2.7% in May from 3.5% in April. LatinFocus Consensus Forecast panelists expect the Argentine economy to expand 0.4% in 2018, which is down 0.5 percentage points from last month’s forecast. For 2019, panelists expect the economy to expand 1.9%. REAL SECTOR | Industrial production contracts at sharper pace in June In June, industrial production plunged 8.1% over the same month last year, according to data released by the National Statistical Institute (INDEC) on 2 August. The figure represents a significant deterioration compared to May’s 1.2% year-on-year drop and marks a multi-year low. June’s fall reflected contractions in almost all components of the index. The most notable drops were recorded in oil refining, the automotive industry, and the production of rubber and plastic products. The decline in production of processed crude oil was due to plant shutdowns in June, while shrinking domestic demand was chiefly behind the automotive industry’s poor showing. The only bright spot was production in basic metal industries, which hit almost two-digit growth on the back of a jump in crude steel production. Panelists participating in the LatinFocus Consensus Forecast expect that industrial production will expand 0.1% in 2018, which is down 0.4 percentage points from last month’s forecast. For 2019, the panel expects industrial output to rise to 1.9%. OUTLOOK | Consumer sentiment improves marginally in July The Universidad Torcuato di Tella (UTDT) consumer confidence index inched up from June’s over four-year low of 36.0 points to 36.3 points in July. Despite the increase, the index still remains significantly below the 50-point threshold that separates pessimistic from optimistic sentiment among consumers, where it has been almost uninterruptedly since January 2016. July’s print reflected an improvement in two of three components of the index: Consumers’ view of the macroeconomic situation improved notably; while expectations of their personal economic situation also increased, but a slower pace. Willingness to purchase durable goods and big-ticket household items (appliances, cars and houses), however, dropped steeply. Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 0.7% in 2018, which is down 0.3 percentage points from last month’s forecast. For 2019, panelists expect private consumption to increase 1.3%. MONETARY SECTOR | Inflation soars in June According to the National Statistics Institute (INDEC), national consumer prices rose 3.7% over the previous month in June, coming in above May’s 2.1% month-on-month increase. June’s print reflected a broad-based increase in all 12 components of the index, with transportation, and food and nonalcoholic beverages recording the largest price increases. National inflation jumped from 26.3% in May to 29.5% in June, the highest print since March 2017. National inflation as measured by INDEC is expected to be 30.4% at the end of the year 2018, which is up 0.8 percentage points from last month’s forecast. Inflation is expected to reach 20.2% at the end of 2019. The current LatinFocus projections vastly exceed the Central Bank’s target of inflation for the end of 2018 (15.0%) and for the end of 2019 (17.0%). Data compiled by the Statistical Institute of the city of Buenos Aires showed that consumer prices in the city of Buenos Aires rose 3.7% month-on-month in June, up from May’s 2.3% increase. Inflation jumped from 27.2% in May to 29.8% in June, an over one-year high. 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. MONETARY SECTOR | Central Bank keeps seven-day repo rate unchanged at record-high of 40.00% in July At its latest meeting held on 10 July, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) decided to leave the seven-day repo reference rate unchanged at an all-time high of 40.00%. The decision was widely expected by market analysts, as the Bank attempts to restore confidence by supporting the currency following months of financial volatility and a currency sell-off throughout the second quarter. Elevated price pressures and expectations of weak economic data following the currency rout that began in late April drove the decision. According to the National Statistics Institute (INDEC), national consumer prices rose from May’s 2.1% month-on-month increase to a survey-high of 3.7% in June. National inflation also increased sharply and reached 29.5% in June (May: 26.3% year-on-year), well above the Bank’s target of 15.0% to be reached by the end of 2018 and 17.0% in 2019. Real sector data in Q2 is expected to be disappointing due to the delayed impacts of a severe drought in the first quarter, while sharp monetary policy tightening by the Bank will stifle growth in the domestic economy. The industrial sector is, meanwhile, expected to be greatly impacted by high interest rates. The BCRA took a wait-and-see-approach in the latest meeting and stated that they will only raise rates further if inflation edges higher from their current forecasts. The Bank considers that current measures to contain inflation are sufficient and will bear fruit in the next few months; raising rates any further is considered a measure of last resort to stem price pressures, due to the negative impact it would have on economic activity. The next meeting will be held on 7 August. On average, panelists participating in the LatinFocus Consensus Forecast see the 7-day repo repurchase rate ending 2018 at 35.51%. They see the 7-day repo repurchase rate easing further in 2019, closing the year at 25.93%. EXTERNAL SECTOR | Trade deficit narrows in June on declining imports Exports fell 1.4% in year-on-year terms in June, an improvement from May’s revised 6.5% year-on-year contraction (previously reported: -6.0% year-onyear). The decrease was driven by a sharp contraction in exports of primary products as a devastating drought in the first quarter hampered the sector. Manufactured industrial goods exports, however, rebounded from last month’s contraction, while exports of fuel and energy expanded at a faster pace. Annual growth in imports swung from a 6.3% increase in May to a 7.5% contraction in June. The decline reflected a contraction in six of the seven components of the index, with the categories of capital goods, consumer goods and automotive vehicles recorded the steepest drops. As exports decreased at a slower pace and imports declined faster, the trade deficit narrowed from USD 1.3 billion in May to USD 382 million in June (June 2017: USD 576 million deficit). The 12-month moving average of the trade deficit came in at USD 11.0 billion, slightly below May’s USD 11.3 billion deficit (June 2017: USD 1.2 billion shortfall). Panelists participating in the LatinFocus Consensus Forecast expect exports to expand 6.4% in 2018 and imports to increase 2.6%, pushing the trade balance to a USD 6.5 billion deficit. For 2019, the panel expects exports to increase 8.5% and imports to expand 3.0%, with a trade shortfall of USD 3.2 billion.
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