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Economic activity accelerates
Economic growth accelerated in the second quarter of the year. According
to the National Statistical Institute (INDEC), the monthly indicator for
economic activity (IMAE, Estimador Mensual de Actividad Económica) rose
8.6% in June over the same month last year. The June reading was below
the 10.6% expansion observed the prior month. However, seasonally
adjusted data indicate that activity picked up, as the IMAE rose 1.72%
over the prior quarter, which was up from the 1.17% increase observed in
the first quarter. As a result of the strong June reading, gross
domestic product (GDP) grew 9.8% in the second quarter over to the same
period last year. The preliminary second quarter figure was well ahead
of last month’s Consensus Forecast estimate of 8.4% and exceeded the
first quarter reading of an 8.0% expansion. However, given the high
comparison base of last year, the strong growth rates are likely to give
way to a more moderate expansion in economic activity in the coming
months.
Unemployment resumes decline as job creation
increases steadily
Unemployment trends reflect the favourable developments in
the economy. In the second quarter, unemployment dropped to 12.1% from
13.0% observed in the first quarter. The second quarter reading was well
below the 14.8% figure registered in the same quarter last year. More
recent indicators from the Ministry of Labour show that the total number
of jobs in the economy rose 8.9% in July of this year over the same
month in 2004. The July figure was slightly up from the 8.8% job
increase observed in June. Employment increased particularly in the
construction industry and in financial services, where the number of
jobs grew 28.7% and 9.6% in July over the same month last year.
Private consumption benefits from favourable
employment conditions
In June, supermarket sales rose 7.9% over the same month last year,
which was well ahead of the 4.9% pace registered the previous month and
represented the highest growth rate observed since January. All
sub-sectors experienced double-digit growth over the same month last
year with electronics and household items along with drugstore products
experiencing the strongest increases. A month-on-month comparison does
not bear out the strong private consumption surge indicated by the
annual reading. In fact, real supermarket sales actually dropped 2.03%
over May, which contrasted the 5.42% increase observed the previous
month. Nevertheless, the annual average growth rate in supermarket sales
continued the upward trend observed since April, reaching 5.7%, which
was up from the 5.0% reading the prior month. More recent data suggest
that consumption continues to be healthy. The University Torcuato di
Tella's (UTDT) national consumer confidence index (ICC) rose from 50.5
points in July to 52.1 points in August. The sub-index that measures
sentiment about the economic situation in the short and medium term rose
65.7 points, which was up from the 64.1 point reading in July. Moreover,
the sub-index for durable consumer goods rose to the highest level
observed since February, indicating favourable prospects for private
consumption.
Investment surge persists but moderating
Construction trends indicate that investment continues to grow at a
healthy pace. In July, construction activity remained buoyant with
growth reaching 9.8% over the same month last year, which was virtually
unchanged compared to the 10.0% expansion the previous month. However, a
month-on-month comparison suggests a more pronounced moderation in July,
as activity dropped 0.37% over the previous month. Growth was strongest
in oil-related and road construction activity. As a result of the July
figure, the annual average growth rate declined moderately from 10.7% in
June to 10.2%. Trade data confirm the moderation in construction
investment activity. According to the Ministry of Economy, capital goods
imports rose 24.6% in July, which was down notably from the 83.8%
reading the previous month. Nevertheless, annualized capital goods
imports remained very strong with growth reaching 54.3% over July 2004,
which was down moderately from the 60.6% expansion the prior month.
Outlook upgraded amid persistence of healthy
growth
Consensus Forecast participants anticipate that the pace of economic
activity will remain healthy but moderate through the end of this year
with full-year growth reaching 6.8%. This month’s Consensus Forecast
estimate for gross domestic product (GDP) growth has been revised upward
by 0.1 percentage points compared to last month to reflect the higher
than expected growth in the first half. The current Consensus Forecast
estimate remains well ahead of the government’s official 5.5% growth
estimate and even exceeds the Central Bank’s more optimistic 6.5%
forecast. Next year, growth is likely to moderate, as Consensus Forecast
panellists anticipate economic activity to slow to a 4.0% pace, which is
up 0.1 percentage points from last month’s estimate but well below the
government’s preliminary forecast of 5.0% growth.
Consumer prices on remain on upward track
Consumer prices increased 0.44% in August, which was down from the 1.00%
increase registered in July and below market expectations. A spike in
food and beverage costs as well as transportation prices prompted the
August increase. Furthermore, a significant decline in recreation and
clothing prices helped keep inflationary pressures at bay. As a result
of the August reading, annual inflation rose from 9.6% in July to 9.7%.
The healthy pace of economic expansion and rising fuel price continue to
put upward pressure and the ongoing appreciation in the currency is
insufficient to stem the rise. Consensus Forecast panellists expect
annual inflation to reach 10.7% this year, which is unchanged from last
month’s forecast. The current Consensus Forecast reading exceeds the
Central Bank’s inflation target range of 5% to 8% underlying this year’s
monetary programme but is within the government’s forecast of 8% to 11%.
Next year, consumer price pressures should subside, as annual inflation
is expected to drop to 9.2%, which is 0.2 percentage points above last
month’s figure and right on the mark with the government’s 9.2%
preliminary estimate.
Politics keeps legislative activity on hold
The 23 October nationwide legislative elections promise to keep any
meaningful progress on legislative activity on hold for the time being.
The ruling Peronist Party (PJ, Partido Justicialista) is divided between
the political forces supporting President Néstor Kirchner under the
Victory Front (FV, Frente para la Victoria) and those endorsing former
president Eduardo Duhalde under the banner of the Peronist Party. Both
groups are presenting separate candidates in the elections. The lack of
cohesion in the ruling party is an impediment to the legislative
progress, as Congress has been in virtual gridlock for several months
now. Given increased fractionalization within the legislature, which is
likely to persist following the elections, the President is likely to
continue to rely on governing via decree rather than through political
consensus.
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