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Economic growth booms ahead
In the second quarter, gross domestic product (GDP) expanded 10.1%
compared to the same quarter last year. The second quarter figure was
well ahead of the preliminary estimate of a 9.8% expansion based on the
monthly indicator for economic activity (EMAE, Estimador Mensual de
Actividad Económica) in August. Furthermore, the GDP growth reading
exceeded the expansion of 8.0% observed in the first quarter. A
quarter-on-quarter comparison bears out the healthy economic
development, as GDP expanded 2.4% in seasonally adjusted terms over the
first quarter.
Domestic demand propels economy forward as
exports slow
Acceleration in domestic demand was the key driver behind the faster
growth in the second quarter, as domestic demand picked up from 8.7%
annual growth in the first quarter to 12.4% in the second. Booming
investment, which grew 24.4% in the second quarter (Q1 05: + 13.4%
year-on-year), drove the acceleration in domestic demand. Consumption
growth, principally private consumption, also experienced a pick-up
compared to the first quarter, as the growth pace accelerated from 7.8%
to 9.8% in the second quarter. In contrast, exports continued along the
deceleration trajectory observed since the final quarter of last year,
as growth moderated from 13.0% in the first quarter to 4.5% in the
second. Imports, on the other hand, profited from strong domestic demand
and accelerated from 15.7% in the first to 29.7% in the second quarter,
thus, diminishing the net contribution of the external sector to
economic growth.
Agricultural and construction activity
accelerate
Agricultural activity registered a noteworthy growth spurt in the second
quarter with a 25.2% expansion over the same quarter last year. The
second quarter reading more than doubled the 9.4% pace observed in the
first quarter and represented the strongest quarter registered for
several decades. Record output growth in wheat, corn and soy amid
favourable global demand has provided a strong foundation for the
agricultural sector. Construction growth also accelerated strongly, with
growth picking up from 14.0% in the first to 17.9% in the second
quarter. Mining represented the slowest growing sector with growth
reaching just 1.1% over the second quarter last year.
Economic activity remains robust
The strong economic growth pace is likely to have continued into the
third quarter. In July, economic activity rose 7.8% over the same month
last year, according to the monthly indicator for economic activity (EMAE,
Estimador Mensual de Actividad Económica). The July reading was below
the 8.4% annual growth rate recorded in June. A month-on-month
comparison, however, does not corroborate the weaker reading. According
to seasonally adjusted data, economic output grew 0.71% over the
preceding month, following on a 0.08% monthly decline registered in
June. Moreover, economic activity has not yet entered a downward trend.
In July, the annual average growth rate was unchanged at 9.1% for the
third consecutive month.
Private consumption on strong expansion path
Supermarket sales rose 7.7% in July 2005 over the same month last year.
The July reading was just a notch below the 7.9% expansion registered in
the previous month. Sales were strongest in electronics/household goods
and drug store products, while food sales registered the lowest
expansion. Rising incomes and declining unemployment continue to
underpin the robust pace of supermarket sales. A month-on-month
comparison confirms the strong growth, as supermarket sales rose 0.73%
in seasonally adjusted terms over the prior month, which reversed the
2.27% decline registered in June. Despite the healthy July reading,
however, the annual average growth rate in supermarket sales dropped
modestly from 6.5% in June to 6.2%.
Robust investment growth sustained
The surge in investment activity continues unabated. According to INDEC,
construction activity was up 24.8% in August over the same month last
year, which exceeded the 10.8% surge observed the prior month. Strong
growth in oil-related and road construction activity were the key
drivers behind the healthy pace in August. Housing construction
experienced the lowest growth rate but remained well in double-digit
growth territory. Furthermore, in August, capital goods imports were up
42.4% over the same month last year. The August reading was well ahead
of the 24.6% expansion observed in the prior month and continued the
trend of double-digit expansions registered since February this year.
Outlook favourable amid growth exceeding
initial expectations
Strong domestic demand is providing a solid backdrop for continued
robust growth this year. In fact, Consensus Forecast participants expect
GDP to expand 7.3% this year, which is up 0.5 percentage points from
last month’s figure and is in line with the government 7.3% forecast
(revised from 5.5% earlier). Next year, Consensus Forecast participants
anticipate that activity will moderate with economic growth slowing to a
4.3% pace, which is 0.3 percentage points above last month’s estimate
and actually ahead of the government’s 4.0% estimate included in the
2006 budget proposal for Congress.
Annual inflation well ahead of expectations
In September, consumer prices rose 1.17%, which was up from the 0.44%
increase registered in the prior month and ahead of the 0.65%
anticipated by Consensus Forecast participants. Rising food and beverage
costs along with increased clothing prices were the key factors behind
the pick-up in inflation in September, as prices in most other
categories remained contained. As a result of the higher September
reading, the annual inflation rate rose from 9.7% in August to 10.3%. At
its current level, annual inflation remains ahead of the Central Bank’s
target range of 5% to 8% underlying this year’s monetary programme but
is within the government’s projection of 8% to 11%. Consensus Forecast
participants do not anticipate a notable decline in inflation this year,
expecting the annual rate to reach 10.9%, which is up 0.2 percentage
points from last month’s Consensus Forecast figure. Next year, Consensus
Forecast panellists expect inflation to drop to 9.8%, which exceeds last
month’s estimate by 0.4 percentage points.
Government presents budget plan for next year
On 19 September, the government presented the budget for next year to
Congress. The Kirchner administration plans to increase spending to
132.3 billion pesos (US$ 44.5 billion or 22.3% of GDP) next year, which
is up 9.2% in nominal terms from the 118.3 billion pesos this year (US$
40.8 billion or 22.5% of GDP). A more moderate growth scenario next year
is likely to dent income and as a result, the government anticipates
that the primary surplus will reach 19.4 billion pesos (US$ 6.3 billion
or 3.3% of GDP), compared to the 18.3 billion pesos (US$ 6.5 billion or
3.5% of GDP) primary surplus anticipated for this year. The government
expects funding from multi-lateral institutions, including the
International Monetary Fund (IMF) and the World Bank, to resume next
year. However, IMF officials have been clear that the primary surplus
will have to be closer to 4.0% of GDP and that authorities need to
progress on economic reform. The government hopes to progress in
negotiations with the Fund over a new agreement and to successfully
honour the debt servicing payments coming due next year.
Politics factionalized ahead of nationwide
elections
On 23 October, nationwide elections will be held to vote for 24 national
senators, 127 national deputies and 276 representatives toe the
provincial legislatures. The election is considered more important in
determining the leadership of the ruling Peronist Party (PJ, Partido
Justicialista), which is currently running under separate tickets in
several key elections. Internal political forces are divided between
those 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. A clear Kirchner victory
would be an important boost to the president’s political capital as it
would help right the current lack of party cohesiveness that has impeded
progress on the legislative front. The lack of a clear majority, in
turn, is likely to sustain the current legislative gridlock and would
force the government to rely on governing via decree rather than through
clear political consensus.
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