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New government faces economy easing out of
recession
The economy continues to wiggle free from the worst recession
experienced in post-war Argentina. In February, the monthly indicator
for economic activity (IMAE, Estimador Mensual de Actividad Económica)
was up 5.8% over the same month last year, which represents an
improvement compared to the 4.3% growth rate reported for January.
Moreover, the February figure represents the highest reading since June
1998. In seasonally adjusted terms, economic activity grew at an even
faster pace than suggested by the annual data, as the 1.5% increase over
January is equivalent to an annual rate of 24.0%. Industry is the
driving force behind the current economic rebound. In March, industrial
production rose 24.9% over the same month last year, which was up from
the robust 17.0% spike for the same period in the prior month. Textile
production mushroomed by 164.1% and non-metal mineral output jumped
36.2%. The lowest output growth was experienced by the food and
beverages sector and rubber/plastics industries, which grew 4.5% and
4.9% respectively.
Construction rebound…
Construction activity continues to experience a solid rebound even
though the 30.5% expansion registered in March was down from the 39.8%
spike in February. The gradual recovery in credit to the private sector
and a resumption of halted public works projects are currently the key
drivers behind the rebound in building activities. Housing construction
and oil development projects helped bolster growth with 35.8% and 24.1%
expansions respectively.
…to bolster unemployment
The rebound in the labour-intensive construction sector is exerting a
favourable influence over employment conditions. As unemployment
declines gradually, private consumption should also begin to recover.
However, current key consumption-related indicators show that activity
still remains very depressed. In February, real supermarket sales were
down 28.9% over the same month last year, a very small improvement from
the 31.5% drop in January.
Outlook for this year raised again
Participants expect the economy to have entered positive growth
territory in the first quarter of this year with a 3.9% growth rate.
According to the Consensus, the pace of economic growth will accelerate
in successive quarters throughout the year. The current Consensus figure
is now above the 4.0% growth pace anticipated by the government.
Continued favourable export performance and a pick up in domestic
consumption next year should maintain economic activity at a healthy
growth pace.
Currency strengthens further as investors seek
higher yields
The peso continued to recover lost ground in April. The currency
appreciated 1.9% in nominal terms versus the US$, the fifth consecutive
monthly strengthening. At 2.82 pesos to the US$ at the end of April, the
currency closed 19.1% stronger than at the end of last year. In recent
months, the peso has benefited from the strong rebound in the export
sector, which has provided for a rising inflow of foreign currency.
Furthermore, a generalized increase in investor appetite for emerging
market assets has bolstered the currency. Anxious to maintain a
competitive currency to bolster the export sector, the government has
announced that it may begin to intervene in the foreign exchange markets.
Participants do not expect the current strengthening trend to persist
and anticipate the peso to weaken again.
Consumer prices well behaved amid stronger
currency and depressed consumption
In April, consumer prices rose 0.06%, which was down significantly from
the 0.59% increase observed in March and represented the lowest monthly
rate observed since the devaluation in early 2002. As a result of the
modest April increase, the annual inflation rate dropped to 19.4% from
31.2% in the previous month. Sluggish domestic demand and increased
currency stability held a lid on consumer price increases. Furthermore,
continued government-decreed caps on public service tariffs have also
contributed to the drop in inflation. Meanwhile, monthly wholesale
prices dropped 1.89% in April. The April figure confirmed the strong
deceleration in wholesale price increases observed over the last six
months. Nevertheless, the annual wholesale price increase, which was
virtually halved to 32.7% from 62.2% in March, still remains well above
the consumer price figure and indicates that some inflationary pressures
persist.
Encouraged by the more favourable inflation trend, the government has
cut its forecast for this year to 8.0%, which is down from the 14.0%
announced in March and almost a third of the 22.0% assumed in the 2003
budget. The adjusted government figure is well below the current
Consensus estimate, which sees annual inflation decelerating at a more
moderate pace. |
