A strengthening economic recovery is on the horizon for Argentina. Economic activity recorded its best performance in nearly two years in June, and in July industrial production maintained its momentum with a third consecutive month of year-on-year increases. Consumer confidenceresponded with a sharp improvement in August, particularly on optimism about the country’s short-term economic prospects. The peso also strengthened towards the end of August, following the results of a mid-term legislative primary election held on 13 August that were seen as favoring business-friendly President Mauricio Macri as he heads towards October’s parliamentary election. On the fiscal front, the year-to-date primary fiscal deficit reached 1.7% of GDP in July, making the government’s target of a 4.2% deficit for 2017 seem more feasible.
Buoyed by business-friendly reforms adopted by the Macri administration, the economy is expected to rebound this year and next. Fixed investment should recover due to an improved business environment and higher public infrastructure spending, while household spending should benefit from declining inflation and rising wages. Analysts foresee the economy expanding 2.6% this year, unchanged from last month’s forecast, and 2.9% in 2018.
Inflation in the City of Buenos Aires fell from 23.4% in June to 22.9% in July. The Central Bank kept the 7-day repo rate unchanged at 26.25% at its 22 August meeting in a bid to support the disinflationary process. Panelists expect inflation to end 2017 at 22.7%, down 0.1 percentage
points from last month’s forecast, and 2018 at 15.4%. REAL SECTOR | Economic activity gains further steam in June In June, the monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) rose 4.0% year-on-year, the fastest rate in nearly two years and above May’s already-impressive 3.4% expansion. June’s reading was the fourth consecutive month of year-on-year gains in the index, offering a boost to President Mauricio Macri’s market-friendly government ahead of October’s mid-term legislative elections.
The construction and manufacturing sectors both notably contributed to June’s rise. In contrast, the increase was otherwise undermined by the mining and quarrying sector, which has consistently underperformed relative to most other sectors in the Argentine economy since 2016.
A seasonally-adjusted month-on-month comparison showed that economic activity expanded 0.3% in June, following May’s 0.7% increase. On average, economic activity decreased 0.7% in the 12 months up to June, which is an improvement from the 1.4% drop in the 12 months up to May. 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 2.9%.
REAL SECTOR | Industrial production maintains momentum in July In July, industrial production jumped 5.9% over the same month last year, according to the latest data released by the National Statistical Institute (INDEC). The reading followed the 6.6% year-on-year growth recorded in June, which was the highest result since July 2011. July’s reading marked the third straight month of increases in industrial output.
According to INDEC, industrial production’s growth momentum in July was sustained on the back of strong results in the tobacco, metalworking (excluding automobiles), non-metallic mineral products and rubber and plastic products industries. On the other hand, decreases were recorded in the oil refining, textile, and chemical industries. The 15.8% expansion of the metalworking (excluding automobiles) industry—the third-largest industry in Argentina—was supported by growth in construction activity, which benefitted from continuity in the provision of public work permits. The strong 15.2% growth of the non-metallic mineral products industry, which is much smaller
by comparison, was also driven by construction activity, particularly in demand for cement and other construction materials. The decreased momentum in industrial output growth in July was led by the chemical industry, which sold fewer chemicals for the production of synthetic and artificial fibers, recording a 5.4% contraction in output.
The accumulated average annual variation in industrial production over the first seven months of the year was 0.8% in July, a considerably better result than the flat reading recorded in the first six months of the year. Panelists participating in the LatinFocus Consensus Forecast expect that
industrial production will expand 2.3% in 2017, which is up 0.4 percentage points from last month’s forecast. For 2018, the panel expects industrial output to rise 2.5%.
OUTLOOK | Consumer sentiment picks up in August to reach a 17-month high
In August, the Universidad Torcuato di Tella (UTDT) consumer confidence index rose to 47.6 points from 42.5 points in July, a 17-month high. The index nevertheless remains below the 50-point threshold that separates pessimistic from optimistic sentiment, where it has been firmly entrenched since February 2015. Consumers in August were surveyed before the primary elections on 13 August and were likely reacting in large part to healthy economic activity, which hit a 22-month year-on-year high in June.
The index’s rise in August was led by a strong improvement in consumers’ confidence about the country’s short-term macroeconomic prospects; an improvement in their willingness to make major purchases, particularly of home appliances; and an improvement in their outlook regarding future
personal financial situations. Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 2.4% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, panelists expect private consumption to increase 2.7%.
MONETARY SECTOR | Inflation continues its descent in July According to the National Statistics Institute (INDEC), consumer prices in the Greater Buenos Aires capital area rose 1.7% in July from the previous month, up slightly from June’s 1.2% increase but undershooting market expectations
of a stronger 2.0% increase. Data for the monthly variation in consumer prices for the whole country in July showed that consumer prices also rose 1.7% from June, above last month’s 1.2% increase. The result mainly reflected higher prices for housing, water, electricity, gas and other fuels, alcoholic beverages and tobacco, and health services.
According to INDEC, inflation in the Greater Buenos Aires capital area in July came in at 21.5%, below June’s 21.9%. Inflation thus still lies above the Central Bank’s 12.0%-17.0% target for this year. At its 22 August meeting the Central Bank of Argentina decided to keep the 7-day Repo Reference Rate unchanged at 26.25%, in a bid to keep the disinflationary process going.
The latest data compiled by the Statistical Institute of the City of Buenos Aires show that inflation slowed from 23.4% in June to 22.9% in July, the lowest reading in over four years. Still-high inflation came mainly on the back of higher prices for housing, water, electricity and other fuels, food and nonalcoholic beverages and restaurants and hotels, although prices for all three
sub-sectors rose at a slower pace than in the prior month. The different 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 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 22.7% at the end of 2017, which is down 0.1 percentage points from last month’s estimate. Panelists estimate that inflation will end 2018 at 15.4%.
EXTERNAL SECTOR | Trade deficit worsens in July as exports rise but are outpaced by imports
In July, exports climbed 5.2% from the same month last year, contrasting June’s 2.9% fall. July’s reading was supported by strong performances in the exports of industrial goods, agricultural manufactures, and fuel and energy, which were more than enough to offset a fall in the exports of primary products.
As for the export markets which notably contributed to July’s climb, exports to the European Union rose 18.3%. Meanwhile, exports to China, which are heavily concentrated in soy beans, fell. On a monthly basis, exports rose 4.9% in seasonally-adjusted terms in July, contrasting June’s 4.6% decline.
Imports jumped an impressive 29.9% from the same month last year, up from June’s 15.4% expansion. Imports of passenger motor vehicles and industrial transport equipment fueled this acceleration. The trade balance therefore swung from a USD 331 million surplus in July 2016 to a USD 798 million deficit in July 2017. In the 12 months leading up to July, the trade balance posted
an accumulated shortfall of USD 2.3 billion, below the USD 1.2 billion deficit recorded in the 12 months up to June.
Panelists participating in the LatinFocus Consensus Forecast expect exports to expand 3.1% in 2017 and they see imports increasing 12.2%, thus pushing the trade balance to a USD 2.9 billion deficit. For 2018, the panel expects exports to increase 6.1% and imports to expand 7.1%, and expects the trade balance to record a USD 3.7 billion shortfall.
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