Economic recovery remains absent.  Economic activity has remained well below expectations this year.  According to the government, GDP expanded a meek 0.5% and 0.8% year-over-year in the first and second quarter of this year respectively and is expected to have grown by just 0.8% in the third quarter according to preliminary government estimates.  Recent economic indicators confirm across the board that the economy is still far from recovery from last year’s 3.1% contraction.  As a result, the government has again revised growth forecasts for this year downward from 2.0% to 0.5%.

The government’s increased pessimism reflects that growth in investment and consumption remains absent.  The National Statistical Office (INDEC) reports that industrial activity continues to lag.  Seasonally adjusted industrial production contracted 3.5% in October over the same month in 1999 and INDEC’s industry survey confirms that business sentiment remains bleak.  Only 19.0% (down from 20% in September) of the surveyed businesses anticipate domestic demand to increase in the last quarter of this year, while the majority expects no variation (65.8% up from 46.2% in September) or further decline (15.2% down from 33.8% in September).  This month’s Consensus Forecast for industrial production has panellists again cutting their growth estimates for industry this year.  Furthermore, construction activity declined 10.8% in October over the same month last year, the 18th consecutive monthly decline since May 1999.  September trade data also indicate that investment spending remains down.  Annual imports of capital goods declined 11.6% in September over the same month in 1999.  The absence of an investment recovery remains a principal cause for the persistence of slow growth rates this year.

On the consumption side tight credit conditions, high unemployment (15.4%) and a higher tax burden continue to stifle growth.   According to INDEC, supermarket sales rose a modest 0.5% in October over September.  However, when compared to the same month last year, supermarket sales actually declined 1.8%, which represented the eleventh consecutive year-over-year decline since December 1999.  The University Torcuato di Tella's (UTDT) November consumer confidence index (ICC) indicates that consumption is unlikely to show substantial improvement for the remainder of this year as confidence dropped another 11.6% over October, the third consecutive monthly decline.  In addition, consumers remain particularly sceptical about macroeconomic prospects.  The sub-index of the ICC that measures expectations about macroeconomic prospects for the coming year dropped 12.3% over October.

In October, the UTDT’s index of leading economic indicators dropped 3.0% over the same month last year.  The October decline followed a 0.9% drop in September and meagre 1.3% growth in August.  The government has been forced to revise growth data downward several times this year.  In addition to expecting growth below 1%, the government now estimates that the economy will expand only 2.5% next year, down from the previous 3.7% projection.  Consensus Forecast panellists continue to revise growth estimates for this year downward.  The lower estimates for the final two quarters of this year have prompted another downward revision in the forecast for this year, the fifth consecutive downward revision.  Panellists have also again revised downward their growth estimates for 2001.

Financing hinges on adoption of economic measures.  A combination of uncertainty in economic and political prospects impelled international markets to go sour on Argentina last month.  The resulting sell-off of Argentine assets caused sovereign bond spreads to widen substantially and turned investor’s attention to the Argentine financing position in the face of tight international liquidity conditions.  Particularly disconcerting is the increased burden that rising costs on government debt pose to growth prospects.

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