Argentina - Economic Briefing April 2004

Economic Recovery Proceeding Favourably but Energy Concerns Mount

The economy continues to proceed along a strong recovery path, driven by a bouyant external sector and rising domestic demand.  However, the public utility tariff freeze adopted by the government has forced energy companies to cut back investment.  The resulting investment shortfall has created a disequilibrium between stagnant electricity supply and blooming domestic demand.  So far, the country has averted direct rationing by importing energy from neighbouring countries and cancelling existing export agreements.  However, if officials have to turn to energy rationing, the current robust recovery could come to an abrupt end..

Government confirms robust growth expansion for last year
In the final quarter of last year, gross domestic product (GDP) grew 11.3% over the same quarter the previous year.  The fourth quarter figure was above the already strong 10.2% expansion registered in the third quarter and continued the acceleration in economic growth throughout the year as the country recovered from the devastating 2002 recession..  

Investment spikes amid improved export setting and lower interest rates
The robust growth in domestic demand was the key driver behind the acceleration in growth in the final quarter, as activity rose 15.0% over the same quarter in 2002, which was up from the 13.2% expansion in the prior quarter.  Ballooning growth in investment of 48.8% in the fourth quarter (Q3 03: +44.9% yoy) was the key factor behind the growth spurt in domestic demand.  Consumption also recovered notably in the fourth quarter, albeit at a lesser 9.7% rate (Q3 03: +8.8% year-on-year).  Export growth accelerated to 7.4% from 5.4% in the previous quarter.  Import growth remained extremely strong amid the pronounced rebound in domestic demand and the weak comparison base with an expansion of 52.0% over the same quarter in 2002, which was up from 46.2% growth in the third quarter.

Construction boom bolsters overall growth
In the fourth quarter of 2003, growth was strongest in the construction sector, where activity increased 45.8% over the same quarter the prior year (Q3: +42.8% yoy).  The construction pick up was favoured by significantly lower interest rates and an improved credit setting.  Manufacturing increased by 16.2%, wholesale and retail trade 16.1% along with transport, storage and communication, which added +12.3%.  The only sector to remain in negative territory was financial services, where activity dropped 17.0% over the same quarter the previous year, as banks have been slow to recover from the adverse repercussions of the 2002 devaluation.

Growth strong but slowing
More recent data suggest that the momentum observed in economic activity in the fourth quarter of last year carried over into the first month of this year.  In January, the monthly indicator for economic activity (IMAE, Estimador Mensual de Actividad Económica) was up 9.9% over the same month last year, which represented only a small moderation from the 11.5% growth rate reported for December.  Moreover, in seasonally adjusted terms, the economy expanded 1.8% over December, which was much stronger than the December reading when the economy remained flat.

Outlook improves
As a result of the robust fourth quarter GDP expansion, economic activity for the full year rose 8.7% in 2003, which was well above the government’s official 7.0% growth figure and a notch above the 8.4% Consensus Forecast estimate from last month.  Even though last year’s economic recovery was very robust and broad-based, the impressive growth rate was achieved on the back of a very weak comparison base following a four year recession.  Moreover, even with these stellar growth rates, GDP is not yet close to reaching pre-crisis levels and at the end of 2003 was less than half the level observed in 1998.  A series of economic developments this year is likely to impede a repetition of last year’s strong growth performance as uncertainty about the government’s economic policy priorities lingers, the financial system remains fragile and the bond restructuring is delayed.  As a result, participants see growth slowing this year to a more moderate but healthy 6.5% pace, which now exceeds the government’s 6.0% estimate.