President Mauricio Macri’s government made important progress in his drive to liberalize the economy. The 2018 budget and a highly controversial tax and pension reform plan were approved by the congress in the final weeks of 2017. The pension and tax reform envisages lowering the government’s elevated public sector spending and making Argentina amore attractive investment destination. It should give a further impetusto the economy, which is on a solid recovery path, as confirmed by the latest data. Economic growth reached 4.2% annually in Q3, a notable
acceleration from Q2’s 2.9% expansion and the fastest print in over four years. Despite strong GDP growth, the economy remains under pressure.
On 28 December, the Central Bank revised its inflation target for the next two years, as the country missed its 2017 target and tight monetary conditions are stifling economic activity. The announcement caused the peso to depreciate sharply and will likely undermine the Bank’s credibility
in anchoring inflation and achieving the government’s fiscal reduction plans.
Argentina’s economy is set to accelerate in 2018 and 2019 amid solid growth in private consumption and fixed investment. FocusEconomics panelists see the economy expanding 3.0% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, growth is expected
to reach 3.2%.
Inflation in the city of Buenos Aires jumped from 23.6% in November to 26.2% in December. Inflation is set to remain elevated, as the Central Bank’s tightening cycle came to an end and the 7-day repo reference rate was slashed by 75 basis points to 28.0% on 9 January. Panelists expect
inflation to end 2018 at 18.6%. For 2019, inflation is set to moderate to 13.2%.
REAL SECTOR | Economic growth jumps in Q3 According to the Statistical Institute (Instituto Nacional de Estadísticas y Censos, INDEC), economic growth in Q3 accelerated from a revised
2.9% annual expansion in Q2 (previously reported: +2.7% year-on-year to 4.2%. The print marked the third consecutive quarter of growth, and the fastest expansion in over four years. The acceleration was spearheaded by the domestic economy, which is showing clear signs of strengthening. On
a quarter-on-quarter basis, economic growth came in at 0.9%, above Q2’s 0.7% increase. Overall, Q3’s national accounts data suggests that President Mauricio Macri’s turn to economic responsibility is bearing fruit. The positive data came shortly after the legislative approved a controversial reform of the pension system.
Annual growth in the domestic economy was buttressed by a surge in domestic demand, which grew 8.4% in Q3, more than doubling the 4.0% year-on-year expansion recorded in Q2. Private consumption ticked up from a 3.7% increase in Q2 to a 3.8% rise in Q3, the strongest reading since Q3 2015. Fixed investment expanded an impressive 13.9% in Q3, coming in well above Q2’s already solid 7.7% increase. The acceleration in Q3 was driven by an expansion in construction and transport equipment and machinery and equipment and marked the fastest pace of expansion in six years. This attests to the ongoing recovery in the industrial sector. Lastly, growth in government consumption came in at 1.8%, down from 2.9% in Q2, a testament to the government’s efforts to curb public spending and increase fiscal responsibility.
Contrasting the domestic economy, the performance in the external sector was less positive. As imports grew at a much faster pace than exports, the external sector made a negative contribution to growth. Exports swung from a 1.2% annual contraction in Q2 to a 2.1% expansion in Q3, due to recovering overseas orders. On the other hand, growth in imports surged from a 9.1%
increase in Q2 to a sharp 18.7% rise in Q3. The increase largely reflected imports of industrial equipment into the economy, in line with growth in fixed investment.
The Q3 GDP result was further good news for President Macri following a complicated 2016. Economic growth in the first three quarters recorded a cumulative expansion of 2.5% and the positive momentum is expected to carry over into the last quarter of the year, as the latest real sector data suggests.
The expansions expected this year and next year would mark the first two consecutive years of growth since 2011 and underscore the positive impact Macri’s pro-market, fiscally responsible policies are having on the economy,which was plagued by economic distortions and imbalances.
Our panelists expect the economy to grow 3.0% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, panelists expect the economy to expand 3.2%.
REAL SECTOR | Economic activity accelerates in October In October, the monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) recorded another sharp expansion. Growth in economic activity accelerated from September’s 3.2% year-on-year
increase to 5.2% in October. October’s print marks the eighth consecutive month of growth and the strongest expansion since May 2013. The figure reflects increases in all but one component of the index. Construction output expanded at the fastest pace, with an 18.8% year-on-year increase. It
was followed by an 8.4% rise in financial intermediation and a 6.8% annual increase in wholesale and retail trade. Electricity, gas, and steam was the only
subcomponent that contracted in October.
A seasonally-adjusted month-on-month comparison showed that economic activity swung from a 0.3% contraction in September to a 0.2% rise in October. Lastly, economic activity in the 12 months up to October jumped to 2.2% on average, up from 1.4% in the 12 months up to September.
REAL SECTOR | Growth in industrial production slows in November In November, industrial production grew 3.5% over the same month of the previous year, according to the latest data released by the National Statistical
Institute (INDEC). The reading came in below the 4.4% year-on-year growth observed in October. November’s print marked the seventh consecutive month of growth in industrial output, following 15 consecutive contractions.OUTLOOK | Consumer sentiment plunges in December
In December, the Universidad Torcuato di Tella (UTDT) consumer confidence index declined to 43.2 points from 51.1 points in November. The index therefore fell below the 50-point threshold that separates pessimistic from optimistic sentiment.
The index’s sharp drop was due to a broad-based decline in all three main components of the index. Willingness to purchase durable goods and real estate recorded the largest drop and was closely followed by a deterioration of the country’s macroeconomic outlook and personal economic prospects.
Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 3.1% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, panelists expect private consumption to also increase 3.1%.
MONETARY SECTOR | Central Bank misses inflation target in 2017 According to the National Statistics Institute (INDEC), consumer prices in the greater Buenos Aires capital area rose 3.4% in December compared to the previous month, which was significantly above November’s 1.2% rise. Core consumer prices in the Buenos Aires metropolitan region also increased from 1.3% in November to 2.0% in December. Inflation in the greater Buenos Aires capital area jumped from 20.9% in November to 25.0% in December. Data for the month-on-month variation in consumer prices for the entire country showed increased 3.1% in December from the previous month,
coming in above November’s 1.4% rise. The result reflects in large part a 17.8% increase in prices for households, water, electricity, gas and fuel. Core consumer prices, which exclude volatile and non-regulated products, rose 1.7% month-on-month (November: +1.3% mom). In annual terms, inflation for the entire country reached 24.8% in December, coming in above November’s
21.0% increase and far exceeding the Central Bank’s 12.0%–17.0% target for 2017.
The latest data compiled by the Statistical Institute of the city of Buenos Aires showed that inflation in the city of Buenos Aires rose from 23.6% in November to 26.1% in December. The inflation data released by the Statistical Institute of the city of Buenos Aires and INDEC are not comparable, as the structures of the two indices are not the same. 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 in
order to meet its objective of trimming elevated public spending. The Central Bank’s decision to ease its inflation target for 2018 and 2019 implies that short- and mid-term estimates of government spending, earnings and the fiscal deficit are putting at risk the health of public finances and the government’s fiscal consolidation efforts.
Panelists surveyed for this month’s LatinFocus report expect inflation in the Buenos Aires province to be 18.6% at the end of 2018, which is up 1.9 percentage points from last month’s estimate. Panelists estimate that inflation will end 2019 at 13.2%.
MONETARY SECTOR | Central Bank cuts policy rate in January At its monetary policy meeting held on 9 January, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) slashed the 7-day Repo Reference rate by 75 basis points. The 7-day repo reference rate now stands
at 28.00%, and the decision marked the first rate cut since November 2016. The latest rate cut followed two rate hikes in October and November, and the Central Bank’s decision to modify the inflation target for 2018 and 2019 on 28 December. The inflation target for 2018 now stands at 15.0% (previous target: 12.0%–8.0%) and at 10.0% in 2019 (previous target: 6.5%–3.5%). The
decision to adjust the inflation target follows the government’s inability to meet the 2017 inflation target and the adverse impact that the tight monetary policy was having on the domestic economy.
The Bank’s latest decision was in line with market expectations, after the Bank’s inflation targets for 2018 and 2019 were eased. The decision to lower the 7-day Repo Reference rate by just 75 basis points reflected the delicate balancing act between rekindling faster economic growth and keeping inflation at bay. A more pronounced cut of the 7-day repo reference rate would have
put significant pressure in the Argentine peso and stoked inflation as a result. The Bank is expected to loosen monetary conditions gradually in the upcoming months. The BCRA stated its commitment to lowering the main interest rate without causing major interruptions in the economy or negatively impacting inflation. The number of rate cuts and the magnitude of each cut remains
uncertain and will depend on more recent economic data. Participants in the LatinFocus Consensus Forecast see the 7-day Repo Reference rate ending 2018 at an average of 21.43%. Panelists see the 7-day Repo Reference rate easing further in 2019 and expect it to close the year at an average of 15.85%.
MONETARY SECTOR | Changes in Central Bank inflation targets cause Argentine peso to depreciate The Argentine peso slid at the end of the year. On 29 December, it closed
the day at 19.18 ARS per USD, which represented a steep 9.5% depreciation over the same day of the previous month. As of 29 December, the Argentine peso had lost 16.9% of its value year-to-date and was also 18.1% weaker compared to the same day last year.
The currency came under severe pressure after the Argentine Central Bank eased the country’s inflation target for 2018 and 2019 on 28 December. The decision signaled that the Central Bank will soften its aggressive monetary stance to mitigate the impact on economic activity, and that multiple cuts to the 7-Day repo rate in 2019 are on the table. This caused yields of pesodenominated
bonds and stocks to drop, and will make peso-denominated instruments less attractive to investors, leading the currency to depreciate as a result.
The Argentine peso is expected to depreciate in the next two years as monetary conditions are loosened. Analysts do not consider a depreciation of the peso as inherently bad for the country’s battered external sector because the currency was seen as overvalued. In addition, a weaker peso could boost exports and reduce the widening current account deficit. However, a weak
peso could stoke inflationary pressures and erode disposable income, denting the country’s economic recovery. Panelists surveyed for this month’s LatinFocus report expect the ARS to end
2018 at 21.04 ARS per USD, and it projects the Argentine peso to trade at 23.27 ARS per USD at the end of 2019.
EXTERNAL SECTOR | Trade deficit widens in November on a drop inexports In November, exports contracted 4.9% in year-on-year terms, contrasting the strong 10.8% increase observed in October. November’s decline reflected a 16.8% annual drop in manufacturing of agricultural products and a 1.0% decline in primary products sold overseas. In dollar terms, exports reached
USD 4.6 billion, coming in below the previous month’s USD 5.2 billion and the USD 4.8 billion recorded in the corresponding month of 2016.Imports accelerated from a 29.5% increase in October to a 30.2% rise in November. The acceleration was driven by a broad-based increase in all
components of the index, with the fuel and lubricants category recording the sharpest expansion. In dollar terms, imports reached USD 6.2 billion, level with the previous month’s value and above the USD 4.7 billion recorded in November 2016.
As exports contracted and imports surged, the trade balance consequently worsened from a USD 124 million surplus in November 2016 to a USD 1.54 billion deficit in November 2017. In the 12 months leading up to November, the trade balance posted an accumulated shortfall of USD 7.6 billion, below the USD 5.9 billion deficit recorded in the 12 months up to October.
Panelists participating in the LatinFocus Consensus Forecast expect exports to expand 6.0% in 2018 and imports to increase 7.9%, pushing the trade balance to a USD 8.0 billion deficit. For 2019, the panel expects exports to increase 6.5% and imports to expand 7.3%, with a trade shortfall of USD 9.1
billion.
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