Argentina - Economic Briefing October 2004

Economy Hums Along Amid Strong Domestic Demand

Economic activity remains very robust, as declining unemployment, low interest rates and improved investor confidence continue to drive the rebound.  However, growth is beginning to slow as the stronger comparison base of last year – when the recovery from a debilitating four-year recession was in full swing – is kicking in.

Growth moderating amid stronger comparison base of last year
In the second quarter, gross domestic product (GDP) grew 7.0% over the same quarter last year.  The second quarter reading confirmed the preliminary release provided by the monthly estimator of economic activity (EMAE, Estimador Mensual de Actividad Económica).  However, the second quarter figure was well below the robust 11.3% growth observed in the first quarter of the year.  The pace of expansion receded, as the stronger comparison base for the same period last year rendered double-digit growth rates more difficult to achieve.  A quarter-on-quarter comparison confirms the moderation in economic activity, as GDP growth slowed to 0.49% over the prior quarter in seasonally adjusted terms from 1.51% in the first quarter of this year.

Robust investment growth continues to drive activity
The exuberant growth observed in investment in the first quarter, when activity increased by 50.3% over the year-ago period could not be sustained..  However, investment still expanded a very respectable 38.3% in the second quarter.  The current deceleration reflects a natural drop from unsustainably high levels but also reflects a stronger comparison base last year, when the current boom in investment activity was already in full swing.  Consumption exhibited a similar deceleration, with growth slowing from 9.9% in the first quarter year-on-year to 6.6% in the second quarter.  Surprisingly, export growth entered negative territory with a 7.7% contraction over the same quarter last year.  The decline in exports observed in the second quarter contrasted a robust 7.7% expansion in the prior quarter.  Meanwhile, import demand moderated only from 55.8% growth in the first to a 42.4% expansion in the second quarter.

Construction, manufacturing and commerce drive activity
With the exception of financial intermediation, all sectors experienced a slowdown in the second quarter.  Construction remained the fastest growing sector with a 32.4% expansion in the second quarter over the same quarter last year (Q1: +41.4% year-on-year).  Manufacturing and wholesale/retail commerce followed behind with lesser but still strong growth of 13.2% (Q1: +15.8% yoy) and 11.8% (Q1: +16.4% yoy) respectively over the same period.  On the downside, financial intermediation and fishing remained in negative territory, as activity declined 11.1% (Q1: -12.8% yoy) and 11.7% (Q1: -5.7% yoy) respectively over the same quarter last year.  Similarly, agriculture dropped into negative territory, as activity plummeted 11.6%, following on 9.0% growth in the first quarter.

Growth momentum continues to moderate
More recent data suggest that the moderation in the growth momentum observed in the second quarter carried over into the third quarter of this year.  In July, the monthly indicator for economic activity IMAE, rose 6.0% over the same month last year, which represented a slowdown from the 8.6% growth rate reported for June.  Moreover, in seasonally adjusted terms, the economy expanded 0.52% over June, which was down from the 0.96% growth observed in the previous month.

Positive outlook sustained
Consensus Forecast participants expect the moderation observed in the first half of this year to persist in the second half.  The slowdown can be attributed principally to a stronger comparison base last year, when the economy was in full rebound from a crippling four year recession.  Declining unemployment, lower interest rates and the robust pick up in global demand have served to bolster economic growth notably.  However, growth is anticipated to decelerate to 5.8% in the third and 4.4% in the final quarter of the year.  As a result, full year growth is seen to reach 7.0%, which is 0.1 percentage point above last month’s Consensus Forecast figure.  Next year, economic growth is anticipated to moderate further to 3.9%, which is unchanged compared to last month’s figure.