Argentina - Economic Briefing September 2004

  IMF Agreement on Hold Until Debt Restructuring Concluded (continued)

Construction remains backbone of economic expansion but deceleration on the rise
In July, construction activity grew a robust 17.6% over the same month last year.  The July figure was well below the 29.0% expansion observed the prior month.  Infrastructure and road works registered the strongest growth rates, whereas activity in housing and oil-related construction decelerated notably.  Even though the monthly drop is not sufficient to indicate a clear decelerating trend, the variation in the annual average of the construction activity index shows a steady deceleration in activity since March. 

Growth anticipated to slow further as weak comparison base of prior year wanes
Consensus Forecast participants see the economic expansion moderating further in the second half of the year, as the stronger comparison base of last year renders achieving the exuberant growth rates observed in the past quarters more difficult.  In fact, panellists expect growth to moderate in the third quarter of this year to 6.3% and further to 4.0% in the final quarter.  Nevertheless, the annual growth rate is anticipated to remain healthy, with gross domestic product (GDP) expected to increase 6.9%, which is 0.1 percentage points below last month’s forecast but remains ahead of the government’s 6.0% estimate.  Next year, economic activity is likely to moderate, as Consensus Forecast participants expect GDP to expand at a lesser 3.9%, which is a notch below the government’s 4.0% estimate.

Consumer prices on modest upward trend
In August, consumer prices rose 0.34%, which was below market expectations of 0.63% and the prior month reading of 0.46%.  Nevertheless, the annual inflation rate rose again from 4.9% in July to 5.3% in August.  At its current level annual inflation is still below the Central Bank’s target range of 7% to 11%.  However, high economic growth and gradual currency depreciation are likely to exert some upward pressure on prices throughout the year, as the Consensus Forecast sees annual inflation rising to 7.2%, which is up a 0.1 percentage point from last month.  Next year, inflation is anticipated to rise further to 7.6%, amid higher currency depreciation and continued healthy economic activity.

Fiscal accounts in order as primary surplus widens further
In July, the government coffers registered a primary surplus of US$ 1.65 billion pesos (US$ 560 million or 4.3% of GDP).  As a result of the July reading the accumulated primary surplus for the first seven months of the year reached 13.5 billion pesos (US$ 4.6 billion), which was well ahead of the annual primary surplus target of 10 billion pesos agreed to with the IMF under the terms of the stand-by agreement.  The fiscal accounts continue to benefit from the hold on debt servicing by the government as a result of the default on its sovereign obligations.  Furthermore, the strong economic pace is helping to significantly raise income.  Authorities are confident that a strong primary surplus of 3% of GDP can be sustained next year.  Consensus Forecast participants anticipate that a strong fiscal accounts will help maintain the non-financial public sector balance in a surplus of 1.6% of GDP this year.  Panellists further expect the fiscal balance to remain in a surplus of 1.9% of GDP next year.