Argentina - Economic Briefing February 2004

Economic Rebound to Endure but Moderating this Year

The strong economic expansion experienced in 2003 is likely to moderate but remain robust this year.  The sustainability of the current growth trajectory, however, continues to remain heavily dependent on a resolution of the current stalemate over debt negotiations with international creditors and the adoption of more transparent economic policy.

Robust growth trajectory persists as domestic demand picks up
In November, the economy grew 8.7% over the same month in 2002, according to the monthly indicator for economic activity (IMAE, Estimador Mensual de Actividad Económica) – below the strong 10.3% growth rate observed in the previous month.  In seasonally adjusted terms, economic activity was up 0.6% over October, which was also below the 0.8% increase observed the prior month.

Private consumption picking up amid favourable economic setting
More recent data suggest that while the Argentine economy continues to grow at robust rates, the growth momentum is gradually receding to more moderate levels.  According to the National Statistical Institute (INDEC), real supermarket sales grew 4.4% in November over the same month in the prior year.  The November growth figure represented the fifth consecutive monthly expansion but was well below the 7.5% expansion observed in October.  Automobile sales, on the other hand, more than doubled in December over the same month in 2002, following on 12.0% growth in November.  The year-end growth figure brought annual automobile sales up 21.2% over the prior year’s level.  Furthermore, additional indicators show that consumers remain confident about prospects this year.  In January, the University Torcuato di Tella's (UTDT) consumer confidence index (ICC) for the capital of Buenos Aires rose 13.3% over the previous month - the highest increase observed since the introduction of the indicator in 1998.  Of the surveyed participants, 59.8% anticipate that the economic situation will improve this year, which is up from 46.8% in December.  In addition to the favourable effect of the strengthening exchange rate on real incomes, declining unemployment and increased credit availability is providing a push to the current rebound in private consumption. 

Investment growth up while domestic and external demand rebound
The robust export expansion observed throughout last year continued into December, when exports increased 21.6% over their levels for the same month in the previous year.  The December export growth figure was above the already strong 12.0% expansion observed in the prior month.  Prospects for further recovery in the global economy have prompted exporters to step up their investment activities, particularly as credit availability is improving.  Capital goods imports rose 221.1% in December, which was up from a 159.9% growth rate in the prior month.  As a result, annual capital goods imports were up a staggering 89.9% for 2003.  However, this impressive growth rates were achieved on the back of a very weak comparison base.  In 2002, capital goods imports had dropped 68.5% over 2001 and in absolute terms the level of capital goods imports in 2003 still remained 40.2% below the level observed in 2001.  The construction sector also points towards strong investment activity.  According to INDEC, the construction activity index (ISAC) rose 30.8% in December over the same month the prior year, which was down moderately from the 38.7% expansion the previous month.  Within the construction industry, virtually all sub-sectors registered double digit growth rates, with non-housing construction and infrastructure projects leading the way.  The only sub-sector to experience a decline was oil-related construction, where output dropped 13.0% over the same month the prior year.

Growth outlook favourable as economic expansion remains broad-based
On 1 February, the government announced that it has revised the growth estimate for this year upward to 6.0% from the original 4.0% projection included in the 2004 Budget assumptions, anticipating strong investment growth of 16.0%.  The government’s forecast is now in line with the Central Bank’s estimate announced on 22 January.  Consensus Forecast participants are not as optimistic as the government about the expansion in economic activity this year and anticipate the gross domestic product (GDP) to grow at a lesser 5.5% pace.  This month’s growth forecast for 2004 is up 0.4 percentage points from last month and confirms the trend for increased optimism about the economy since the growth estimate was revised upward for the fifth consecutive month.  However, the economic expansion will moderate towards the end of this year and will decelerate further in 2005, when GDP is seen as expanding 3.8%.