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Recession
to persist through most of first half.
Key economic indicators still do not exhibit a clear trend towards a
pick-up in economic activity. According to the National Statistical
Office (INDEC) seasonally adjusted industrial production dropped 4.2% in
January over the same month in 2000. A 37.4% drop in automobile
production compared to January last year was the main driver behind the
decline, while a 8.9% plunge in textile production and a 7.0% contraction
in non-metal mineral production provided further downward pressure.
On the upside, the chemical products and basic metals industries
experienced healthy expansions of 8.0% and 7.9% respectively.
Business confidence remained unchanged during last year with skepticism
about economic recovery remaining. This month’s Consensus reflects
the subdued business sentiment for the first quarter. Growth is
expected to resume modestly in the second quarter but to accelerate
strongly in the second half of the year. The pickup at the end of
the year should help lift growth in industrial output according to this
month’s survey. Furthermore, the growth acceleration should
provide a solid backdrop for a more solid growth in 2002.
Consumption
still lagging.
Consumption data also indicate that a rebound is still not in the making.
According to INDEC, January accumulated supermarket sales were down 0.4%
compared to the same month last year. Public service consumption
also remained subdued, declining 0.4% over January last year.
Similarly, the National Automobile Association (ADEFA) reports that
accumulated automobile sales dropped 23.7% in January compared to the same
month last year. On the upside the University Torcuato di Tella's (UTDT)
February consumer confidence index (ICC) inched up for the third
consecutive month, indicating that both confidence in the economy and
consumer confidence for the 2001 rose by 5.3% and 4.1% respectively over
this January. Despite increasing optimism, however, this month’s
Consensus Forecast indicates that consumption is likely to remain subdued
this year. In 2002, consumption should experience a stronger push,
as the anticipated decline in interest rates should boost consumer
spending.
Recovery
to hit in second half.
Last month Congress initiated an investigation of the president of the
Central Bank over money laundering and legislators threatened to block the
government’s economic agenda agreed to with the International Monetary
Fund. Nevertheless, the political jitters have not altered the economic
outlook in this month’s Consensus Forecast. According to the March
forecast, the economic recovery this year will be led by strong growth in
the external accounts as exports expand strongly over last year and, to a
lesser extent, by growth in investment. However, participants expect
growth to remain subdued in the first half of this year. In the
third and fourth quarter growth should accelerate. A combination of
continued strong export performance, heightened investment activity and
gradually recovering consumption in 2002 will finally help to pull the
economy clear from its current slump.
Peso
convertibility questioned.
The persistence of the current downturn in economic activity has recently
prompted some international investors to question the longer term
viability of the current fixed exchange rate regime that pegs the
Argentine Peso at one-to-one to the US$. Even though the current
exchange rate policy has served to rein in inflation, it has also tied the
government’s hands in terms of its ability to use monetary policy to
stimulate economic recovery. Nevertheless, given the restraints for
removing the currency arrangement, devaluation is virtually impossible.
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