Argentina - Economic Briefing May 2004

Growth Remains Buoyant but Energy Deficit to Inhibit Potential for Another Banner Year

The economy is proceeding along a robust expansion path, as domestic demand benefits from lower interest rates, improved credit conditions and a stronger exchange rate.  Even though Central Bank intervention in currency markets is not curtailing the appreciation of the exchange rate, the strong global demand and high commodity prices are likely to fuel growth in the external sector further.  Meanwhile, the energy shortages are likely to keep the current expansion below potential.

Growth outlook favourable but uncertainty over impact of energy shortfall overshadowing
In February, the monthly indicator for economic activity (IMAE, Estimador Mensual de Actividad Económica) increased 10.5% over the same month last year – well ahead of the 9.0% growth rate observed in the previous month.  The February figure confirmed that economic growth remains robust.  However, in seasonally adjusted terms, economic activity was unchanged over the preceding month compared to a 1.33% monthly increase in January.

Industrial production accelerates in March
Nevertheless, more recent data confirm that the economy remained on solid footing throughout the first quarter of the year.  In March, industrial production expanded 15.5% over the same month last year.  The March figure was well above the robust 13.4% year-on-year growth number for February and confirmed the acceleration trend observed since the beginning of the year.  Growth remained strong across all sub-sectors of industry with motor vehicle output (+62.7% yoy) and printing/publishing (+40.5% yoy) production leading the way.  The lowest growth rates were observed in textile production and oil processing, where activity rose a more modest 3.5% and 5.7% respectively over the same month last year.

Consumption gaining speed but confidence in recovery waning
Similarly, the strong expansion in private consumption is enduring.  According to the National Statistical Institute (INDEC), real supermarket sales rose 14.9% in February over the same month last year.  The February figure was the strongest growth rate observed since INDEC began tracking supermarket sales in 1996 and was well above the prior month’s 9.1% expansion.  However, consumer confidence has been dented by the current energy shortages.  In April, the University Torcuato di Tella's (UTDT) consumer confidence index (ICC) for Buenos Aires dropped 5.6 percentage points over the previous month.  Of the surveyed participants, 47.0% anticipate that the economic situation will improve in the short and medium term, which was down notably from 55.7% in March and represented the lowest level observed since May last year.  Nevertheless, the favourable effect of the strengthening exchange rate on real incomes, declining unemployment and increased credit availability will continue to provide a more favourable backdrop for the current recovery in private consumption.

Energy shortages to curtail activity but strong growth to persist
The current strong economic expansion could be threatened by energy shortages.  In the aftermath of the devaluation and debt default in 2002, the government had frozen public utility tariffs to avert further erosion of real incomes.  As a result, utility companies cut back on new investments, which effectively froze the capacity of electric energy. In combination with robust economic growth, the stalled investments have prompted energy shortages.  The government has not yet announced a medium-term strategy to address the energy shortfall but has adopted numerous short-term measures to avert a full blown crisis.  In March, electricity voltage in the national grid was cut to avert power outages for residential users and authorities decreed a drastic cutback in natural gas and electricity exports to some neighbouring countries, while simultaneously raising energy imports from other countries in the region.  The government’s efforts to avoid full-scale energy rationing via voluntary energy consumption cuts by residential and commercial users is likely to give way to a more structured programme.  In fact, on 2 May, the government announced measures with explicit economic sanctions if energy users do not diminish consumption.  The plan outlines explicit payment of penalties for residential and industrial users alike.  If energy consumption exceeds 95% of the prior year’s level, then users will have to pay up to 50% more per kilowatt hour of electricity used and up to 40% more per cubic meter for natural gas consumed.  Current estimates place the cost of the energy consumption cutbacks in terms of economic activity at 1-2 percentage point less in GDP growth this year but even so the economic expansion is likely to remain robust.  

Outlook improves despite energy shortage concerns
Optimism about the persistence of the current economic rebound rather than concerns about an energy crisis-induced slowdown continues to drive Consensus Forecast participants’ assessment of growth prospects for this year.  Participants expect economic activity to have expanded 8.8% in the first quarter but to begin slowing by the second to a 7.3% pace.  Furthermore, growth is expected to moderate further in the second half of the year, which will drag down the annual growth rate to 6.8% for this year.  Even so, the Consensus figure for GDP growth for the full year has been lifted again – 0.3 percentage points over last month.  The Consensus outlook is on the lower end of the Central Bank’s revised growth estimate of 21 April for 2004, which sees the gross domestic product (GDP) expanding 8% instead of the previous 6% but still remains ahead of the government’s more conservative 5.5% estimate.  This month’s upward adjustment represents the eighth consecutive improvement in the growth outlook for this year.  However, the pace of economic activity is likely to moderate further next year, with GDP seen to expand at a lesser 3.8%, which is down 0.1 percentage point from last month’s forecast.