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Legislative elections bolster government
In the 23 October nationwide provincial and legislative elections the
government scored an important victory, which consolidates the authority
of the current administration. The ruling Peronist Party (PJ, Partido
Justicialista) had decided to present different candidates in the
elections, representing the political forces supporting President Néstor
Kirchner under the so-called Victory Front (FV, Frente para la Victoria)
and those endorsing former president Eduardo Duhalde under the banner of
the Peronist Party. The results of the elections were a clear
endorsement of the current administration. The FV received 40.1% of the
votes, followed by the Radical Civic Union (UCR, Unión Cívica Radical)
with 13.8% and the non-Kirchner wing of the PJ with 11.2%. As a result,
following the elections, the FV controls 14 of the 24 provinces. On the
national level, the governing political force managed to raise its share
of the Chamber of Deputies by 19 seats to 112 seats of the total of 257.
An additional 10 seats are allied with the president, which raises the
governing coalition’s share to 122 seats – just short of the 129
deputies needed for a quorum. The wing within the governing PJ that
opposes President Kirchner lost 8 seats and will hold 42 seats, followed
by the UCR with 41 deputies, which also lost 5 seats. The government
also won 17 of the 24 seats that were up for election in the upper
chamber, providing the government with a solid majority in the Senate.
The success of the government’s forces has strengthened the political
capital of the president in the legislature and is likely to enable
Kirchner to embark on important pending economic reforms. The
government’s economic policy priorities under the new political
constellation are not yet clearly defined, as a cabinet reshuffle –
perhaps including the current Economy Minister Lavagna - is likely to
follow the convocation of the new congress in December.
Economy remains on strong growth trajectory
According to the monthly indicator for economic activity (EMAE,
Estimador Mensual de Actividad Económica), the economy grew 9.0% in
August over the same month last year. The August reading was well ahead
of the 8.0% expansion observed the prior month and reverted the
successive deceleration observed since May. A month-on-month comparison
bears out the improvement indicated by the annual figure. According to
seasonally adjusted data, the economy grew 0.86% in August compared to
the prior month, which was down from the more pronounced 1.18% expansion
registered the previous month. Furthermore, the annual average growth
rate of economic activity dropped to 9.0% after remaining at 9.1% for
three consecutive months.
The robust growth in economic activity is
likely to have persisted through the third quarter of the year.
According
to the National Statistical Institute (INDEC), industrial production
rose 8.6% in September over the same month last year, which was up
noticeably from the 7.7% expansion observed the previous month and
continued the accelerating trend initiated in June. With the exception
of tobacco and base metals industries, all sub-sectors comprising the
industrial production index experienced healthy growth, with motor
vehicle, rubber and plastics as well as non-metallic mineral output
leading the way. Seasonally adjusted data confirm the continued
resilience of the industrial sector, as production rose 1.18% over the
prior month. Despite the healthy September reading, however, the annual
average growth rate inched downward from the 7.8% expansion observed in
August to 7.7% growth.
Robust pace of construction persists
Construction activity is also likely to have remained very strong in the
third quarter of the year. According to the construction activity
indicator (ISAC, Indicador Sintético de la Actividad de la Construcción),
construction output expanded 19.1% in September over the same month last
year, which was down from the 26.7% increase observed in August.
Nevertheless, all sub-sectors that comprise the ISAC remained in
double-digit growth territory with road and infrastructure being the
main drivers. Moreover, as a result of the healthy September reading,
the annual average growth rate rose for the second consecutive month
from 11.2% in August to 11.7%.
Private consumption slowing
Private consumption continues to proceed at a strong pace with growth
moderating only modestly. In August, supermarket sales grew 3.5% over
the same month last year, which was down from the 7.7% expansion
observed the prior month. All sub-sectors decelerated over the prior
month, with sales of household goods and electronics as well as clothing
and textiles sales registering the strong moderation. A month-on-month
comparison corroborates the slowdown exhibited by the annual data, as
supermarket sales dropped 0.85% in August over the prior month, which
reverted the 0.73% growth observed in July. According to the University
Torcuato di Tella’s (UTDT) monthly consumer confidence index (ICC),
private consumption is likely to have slowed into the third quarter. In
September, the UTDT-ICC dropped 4.1%, continuing a virtually unabated
declining trend in confidence observed throughout this year.
Nevertheless, the surveyed participants, 60.4% anticipated that the
economic situation would improve in the short and medium term, which was
up from 59.4% in August.
Outlook bolstered by continued strength in the
economy
Consensus Forecast participants expect the pace of economic activity to
slow slightly in the third quarter to 7.3%, which is down from 10.1%
growth in the second quarter. Growth is likely to slow further in the
final quarter to a 6.1% pace. Nevertheless, Consensus Forecast
participants anticipate that annual growth will reach 7.7% this year,
which is up 0.4 percentage points from last month’s Consensus Forecast
estimate and is ahead of the government’s 7.3% estimate. Next year, the
decelerating growth pace of the second half of this year is likely to
persist, as Consensus Forecast panellists anticipate economic growth to
moderate to a 4.7% pace – up 0.4 percentage points from last month and
ahead of the official 4.0% government forecast in the 2006 budget
proposal for Congress.
Consumer prices continue on an upward path
Consumer prices rose 0.78% in October, which was down from the 1.17%
spike observed in the previous month and slightly below market
expectations of 0.70%. Rising clothing, education and recreation prices
were the key factors behind the October spike, as increases in most
other price categories remained subdued. Despite the more moderate
October figure, the annual inflation rate rose from 10.3% in September
to 10.7% in October - the highest rate observed since June 2003.
Consensus Forecast participants have factored the higher inflationary
setting into the forecasts for this year with price pressures
anticipated to persist and annual inflation reaching 11.2%, which is up
0.3 percentage points from last month’s estimate. The Consensus Forecast
figure is well ahead of the Central Bank’s 5% to 8% inflation target
range underlying the monetary programme and also the government’s
forecast of 8% to 11% growth. Next year, lower economic growth is likely
to help contain inflation. However, consumer prices are still
anticipated to rise 10.4%, which is also up 0.6 percentage points from
last month’s Consensus Forecast estimate and well ahead of the
government’s 8.6% projection in the 2006 budget proposal.
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