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.
Por Focus Economics - https://www.focus-economics.com/ - desde Barcelona
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