President Mauricio Macri’s government scored an important political victory when it signed a landmark fiscal agreement with regional governors on 16 November. The deal aims to reduce Argentina’s significant fiscal deficit by limiting public spending and eliminating distortive taxes that undermine the competitiveness of goods and services in overseas markets. It attests to Macri’s increased political capital following a mid-term electoral victory on 22 October. The signing of the deal came as recent indicators point to stronger growth. The three-month average of monthly economic activity reached 4.3% year-on-year in Q3, suggesting that GDP growth accelerated notably in the quarter on the back of solid domestic demand. Strong domestic demand, however, has resulted in a widening current account deficit. This, coupled with elevated fiscal spending and a slowerthan-
expected drop in inflation, is putting pressure on the peso and could undermine government efforts to rein in inflation and fiscal spending.
The country is set to grow at a robust pace in the next two years on higher private consumption and fixed investment, the latter of which will be supported by improving business confidence. FocusEconomics panelists see the economy expanding 3.1% in 2018, which is unchanged from last
month’s forecast. For 2019, growth is expected to reach 3.2%.
Inflation in the City of Buenos Aires moderated from 26.2% in September to 24.5% in October. The 7-day repo rate was hiked 100 basis points to 28.75% in November to stem inflation in Argentina. Panelists expect inflation to end 2018 at 16.7%, up 0.4 percentage points from last month’s forecast. For 2019, inflation is set to moderate to 11.5%.
REAL SECTOR | Economic activity continues to expand robustly in
September
In September, the monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) logged another strong reading. Growth in economic activity came in at 3.8% year-on-year, but below the 4.3% observed in August. September’s print marks the seventh consecutive month of growth and suggests that economic activity in the third quarter was strong.
September’s increase reflects a broad-based expansion, with growth observed in almost all components of the index. Double-digit annual growth in fishing and construction and robust growth in financial intermediation, retail sales and manufacturing spearheaded the result. In contrast, the figure was weighed down by a drop in the supply of electricity, gas and water and in mining and
quarrying.
A seasonally-adjusted month-on-month comparison showed that economic activity slowed from a 0.3% expansion in August to 0.1% in September.
Lastly, economic activity in the 12 months up to September jumped to 1.4% on average, up from 0.8% in the 12 months up to August.
Our panelists expect the economy to grow 3.1% in 2018, which is unchanged from last month’s forecast. For 2019, panelists expect the economy to expand 3.2%
REAL SECTOR | Growth in industrial production jumps in October In October, industrial production grew 4.4% over the same month last year, according to the latest data released by the National Statistical Institute
(INDEC). The reading came in above the 2.3% year-on-year growth observed in September. October’s print marked the sixth consecutive month of increases in industrial output, following 15 consecutive contractions.
The monthly reading reflects strong increases in most components of the index. The automotive industry expanded 25.6% annually, and output in nonmetallic products rose 16.5% in year-on-year terms. Other components such as basic metallurgic industries and textile products rose 13.3% and 6.8%, respectively. In turn, the all-important food industry continues to be a drag on
growth; it declined 1.1% in the surveyed period.
The accumulated average annual variation in industrial production over the January-to-October period was 1.8%, coming in above the 1.5% reading observed in the January-to-September period.
Panelists participating in the LatinFocus Consensus Forecast expect that industrial production will expand 2.8% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, the panel expects industrial output
to rise 2.9%.
OUTLOOK | Consumer sentiment stable in November In November, the Universidad Torcuato di Tella (UTDT) consumer confidence index remained stable at October’s 51.1 points. The index is slightly above the 50-point threshold that separates pessimistic from optimistic sentiment, for the
third time since January 2016.
The index’s marginal uptick reflects an increase in the macroeconomic outlook offsetting deteriorations in consumers’ willingness to purchase durable goods rose and perceptions of personal financial situation.
Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 3.2% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, panelists expect private consumption to increase 3.4%.
MONETARY SECTOR | Inflation moderates in October According to the National Statistics Institute (INDEC), consumer prices in the greater Buenos Aires capital area rose 1.3% in October from the previous month, down from September’s sharp 2.0% increase. Core consumer prices
in the Buenos Aires metropolitan region also moderated from 1.8% to 1.1% in October. Inflation in the greater Buenos Aires capital area declined from 24.2% in September to 22.9% in October, remaining above the Central Bank’s 12.0%–17.0% target for this year.
Data for the monthly variation in consumer prices for the whole country in October showed that consumer prices rose 1.5% from the previous month, coming in below September’s 1.9% increase. The result reflects higher prices for all main components of the index, with prices for food and non-alcoholic beverages, and communications coming in on top. Core consumer prices,
which exclude volatile and non-regulated products, rose 1.3% month-onmonth (September: +1.6% mom).
The latest data compiled by the Statistical Institute of the city of Buenos Aires showed that inflation in the city of Buenos Aires dropped from 26.2% in
September to 24.5% in October. 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.
Stubbornly high inflation is a persistent problem for the government, since it will have to continue accumulating external debt to finance the fiscal deficit to meet its objective of trimming elevated public spending. The inability to anchor inflation to the Central Bank targets implies that short- and mid-term estimates of government spending, earnings and the fiscal deficit could be
underestimated.
Panelists surveyed for this month’s LatinFocus report expect inflation in the Buenos Aires province to be 16.7% at the end of 2018, which is up 0.4 percentage points from last month’s estimate. Panelists estimate that inflation
will end 2019 at 11.5%. MONETARY SECTOR | Central Bank raises its main policy rate in
November At its monetary policy meeting held on 21 November, the Central Bank of
Argentina (Banco Central de la República Argentina, BCRA) increased its main interest rate by 100 basis points, following an increase of 150 basis points on 24 October. The 7-day repo reference rate now stands at 28.75%, in a bid to lower high inflation.
The decision to tighten monetary conditions follows the release of the latest Market Expectations Survey (Relevamiento de expectativas de Mercado, REM) on 2 November. The report, produced by the Central Bank, revised up inflation expectations for 2017 and 2018 as the latest data from September disappointed. While core inflation is expected to moderate in the upcoming
months, it will likely not be sufficient to lower headline inflation to a more desirable rate.
The Bank reiterated its commitment to keeping a tight monetary stance but made no explicit mention of tightening monetary conditions further. This implies that the Bank is taking a wait-and-see-approach and will act according to how price levels evolve in the coming months. The Bank hopes that with the latest hike, inflation will decline and converge toward the 10.0% plus or minus
2.0% target for 2018.
Participants in the LatinFocus Consensus Forecast see the 7-day Repo Repurchase rate ending 2018 at an average of 22.22%. Panelists see the 7-day Repo Repurchase rate easing further in 2019 and expect it to close the year at an average of 15.79%.
EXTERNAL SECTOR | Trade deficit widens despite robust rise in exports In October, exports rose 10.8% in year-on-year terms, following a much softer 3.1% increase in September. September’s reading was supported by a jump Monetary Policy Rate | in % Note: 7-day Repo Reference Rate in %. Source: Central Bank of the Argentine Republic (Banco Central de la República
Argentina).24 26 28 30 32 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 % in exports of industrial goods and fuel and energy, and by growth in exports of primary products and agricultural manufactures. In dollar terms, exports reached USD 5.2 billion, level with last month’s reading and above the USD
4.7 billion recorded in the corresponding month of last year. As for the export markets which notably contributed to October’s climb, exports to China surged while exports to the EU and MERCOSUR grew robustly. On the other hand, exports to ASEAN and NAFTA countries contracted.
Imports jumped an impressive 29.5% from the same month last year, up from September’s 24.2% expansion. Imports of fuel and lubricants and passenger motor vehicles fueled this acceleration. The trade balance therefore worsened from a USD 54 million deficit in October 2016 to a USD 955 million deficit in
October 2017. In the 12 months leading up to October, the trade balance posted an accumulated shortfall of USD 5.8 billion, below the USD 5.0 billion deficit recorded in the 12 months up to September. Panelists participating in the LatinFocus Consensus Forecast expect exports
to expand 5.5% in 2018 and imports to increase 8.5%, pushing the trade balance to a USD 8.5 billion deficit. For 2019, the panel expects exports to increase 5.9% and imports to expand 7.4%, with a trade shortfall of USD 10.1 billion.
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