Uruguay’s economy grew at a slower annual rate in the second quarter compared to the pace of expansion seen in the previous quarter. Recent data, however, indicates that the underlying growth story remains positive.
Private consumption performed robustly aided by strong labor market dynamics as unemployment fell to a nine-month low in July and wages grew. Exports also expanded solidly in the first two months of Q3 and this signals sound demand for Uruguayan goods. Meanwhile, the government
launched the third offshore licensing round in conjunction with the national oil firm ANCAP to develop the currently nonexistent hydrocarbon sector; in a bid to diversify the economy away from its reliance on agriculture and forestry. In the political arena, the country’s vice president resigned over
alleged misuse of state funds and was replaced by the country’s first-ever female vice president, Lucía Topolansky.
Growth in private consumption, aided by higher disposable income, and exports are expected to drive growth through year-end and next year. Fixed investment is also likely to rebound going forward as the country moves closer to developing a hydrocarbon sector. Solid economic growth
should also help to reduce the fiscal deficit. Potential regional shocks could darken the outlook, however. Panelists expect GDP to expand 3.0% in 2017 in 2018, the latter is up 0.2 percentage points from last month’s forecast.
• Inflation ticked up to 5.8% in September (August: 5.5%) and remained within the Central Bank’s target range of 3.0%–7.0%. Our panelists expect inflation to end 2017 at 6.4% and 2018 at 7.2% on the back of a weaker peso.REAL SECTOR | Growth decelerates on falling fixed investment
Growth in the economy decelerated in the second quarter of 2017 to 2.8% over the same period last year, according to detailed data released by the Central
Bank on 14 September. The reading came in below Q1’s 4.4% expansion and marked the lowest result since Q3 2016. The deceleration came on the back of a notable fall in fixed investment, mainly due to a noteworthy drop in the construction of electrical power generation equipment. Nevertheless, the economy continued to grow at a respectable pace thanks to expanding private consumption and a significant increase in exports.
Fixed investment shrank by 19.1% in annual terms in Q2, a notable deterioration from Q1’s 0.8% decline. The drop came on the back of a contraction in both private and public fixed investment, with the latter plummeting more than 50% due to a strong fall in infrastructure spending on electrical power generation.
This can be partly explained by the ongoing closure of the La Teja refinery for maintenance, which was reflected in a substantial drop in manufacturing output in the second quarter. Additionally, stockpiles decreased and spending on construction works also fell. The fall in fixed investment was partly offset, however, by resilient private consumption, which grew 4.4% in Q2 year-onyear, up from Q1’s already robust 4.1% expansion and the strongest reading since Q4 2013. Households benefited from rising wages, lower unemployment and declining inflation. Government consumption continued to contract, falling 1.4% in Q2 compared to a 0.6% drop in Q1, once again a testament to the government’s efforts to bring the budget deficit under control.
On the external side, export growth accelerated from Q1’s 6.9% to a fouryear high of 9.3% in Q2 due to a strengthening tourism sector, which greatly benefited from growing tourist arrivals from Argentina. At the same time, import growth swung from a 3.2% increase in Q1 to a 0.8% dip in Q2, due to lower capital goods imports, depressed by plunging fixed investment. As exports grew more than imports fell, the external sector’s net contribution to growth improved, although it remained negative overall.
On a quarter-on-quarter basis, the economy contracted 0.8% in Q2 in seasonally-adjusted terms, which contrasted the 1.5% expansion in Q1. Panelists participating in the LatinFocus Consensus Forecast expect GDP to grow 3.0% in 2017, which is up 0.3 percentage points from last month’s
forecast. For 2018, the panel sees economic output also expanding 3.0%, which is up 0.2 percentage points from last month’s estimate.
MONETARY SECTOR | Inflation picks up in September In September, consumer prices grew 0.5% from the previous month, down from August’s 0.8% month-on-month rise, and matching the Central Bank’s expectations. According to the Statistical Institute, the increase was driven by
higher prices for food and non-alcoholic beverages, healthcare and housing. Following the first increase in inflation in seven months in the prior month, inflation came in at 5.8% in September, up from 5.5% in August. Inflation nevertheless remained within the Central Bank’s target of 3.0%–7.0%. Annual average inflation, meanwhile, fell from August’s 6.9% to 6.7% in September,
the lowest level in nearly seven years. Panelists participating in the LatinFocus Consensus Forecast expect inflation to close 2017 at 6.4%, which is down 0.3 percentage points from last month’s
projection. For 2018, panelists see inflation rising to 7.2%, which is down 0.2 percentage points from last month’s forecast.
MONETARY SECTOR | Central Bank again raises M1+ target growth range to support the domestic economy Uruguay’s Central Bank decided to increase the target growth rate of money
supply, its main policy tool, at its 6 October Monetary Policy Committee meeting. The M1+ growth rate was increased from a target range of 11.0%– 13.0% in Q3 to a target range of 13.0%–15.0% in Q4, in a bid to sustain domestic demand and to anchor inflation expectations within the target range
of 3.0%–7.0%.
Throughout the third quarter of the year, inflation maintained an upward trend but nevertheless remained comfortably within the Central Bank’s target range. This was partly due to weaker inflation dynamics for non-tradable goods, which helped anchor inflation expectations. Robust economic activity leading to a favorable macroeconomic environment together with the inflation
result gave the Bank room to meet the growing demand for money in the Uruguayan economy. The decision was taken in order to consolidate inflation near the center of the target range and to mitigate the dangers of international uncertainty to the domestic economy.
The tone of the statement was unchanged from the prior one, as the Bank restated its commitment to monitoring the global and domestic economy and keeping inflation where it is over a 24-month horizon. The next Monetary Policy Committee meeting is scheduled to take place at the end of December. Panelists participating in the LatinFocus Consensus Forecast expect M1+ to grow 14.0% in 2017. For 2018, the panel sees the monetary aggregate expanding 9.9%.
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