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President replaces Economy Minister
On 28 November, President Kirchner dismissed Economy Minister Roberto
Lavagna and appointed Felisa Miceli as new Minister. Kirchner was widely
expected to reshuffle his cabinet following the 23 October victory in
nationwide legislative, provincial and municipal elections of his
coalition Victory Front (FV, Frente para la Victoria). The exit of
Lavagna was considered probable since he was closely allied with
Kirchner’s chief rival in the ruling Peronist Party (PJ, Partido
Justicialista), Eduardo Duhalde and also enjoyed the support of the
opposition figurehead Raul Alfonsín from the Radical Civic Union (UCR,
Unión Cívica Radical). Furthermore, the standpoints of Kirchner and
Lavagna differed significantly on economic policy regarding inflation
and government spending. Miceli, who was a Central Bank board member,
has been the head of the state-owned Banco de la Nación Argentina since
2003 and is considered a close ally of the president. The incoming
Economy Minister will face the challenge of bolstering investor
confidence, reducing inflation, maintaining fiscal discipline and
negotiating a new agreement with the International Monetary Fund (IMF).
Economic activity remains healthy
The monthly indicator for economic activity (EMAE, Estimador Mensual de
Actividad Económica) rose 9.0% in September over the same month last
year. The September figure was just a notch below the 9.1% increase
registered the prior month and lifted growth for the third quarter of
the year to 8.7% over the same quarter last year. The third quarter
reading came in below the 10.1% growth pace observed in the second
quarter. A slowdown was generally expected - the Consensus had third
quarter growth at 7.5% - given the strong comparison base last year,
when the cyclical recovery was already in full swing. A
quarter-on-quarter comparison does not bear out the deceleration implied
in the annual figures, as economic activity actually grew by 2.40% in
seasonally adjusted terms, which represented a notable acceleration
compared to the 1.96% observed in the previous quarter.
Industrial output remains robust
More recent data show that industrial production growth remains strong.
In October, output increased 9.5% over the same month last year, which
was well ahead of the robust 8.4% expansion registered in the prior
month. With the exception of paper, base metals and processed oil, all
sub-sectors experienced positive expansions in October with motor
vehicles (+24.6 % year-on-year), printing/publishing (+12.7% yoy) and
metallurgy (+12.6% yoy) leading the way. However, a month-on-month
comparison indicates that growth moderated in October, as industrial
output grew 0.72% over the prior month in seasonally adjusted terms,
down from 1.09% in September. Nevertheless, the annual average growth
rate reverted the decelerating trend that had been in place since May
with growth reaching 7.8% in October, up from 7.6% in September.
Private consumption resilient amid declining
unemployment
Supermarket sales data indicate that private consumption continues to
exhibit strong growth. In September, real supermarket sales rose 6.7%
over the same month last year, which represented an acceleration
compared to the 3.5% figure observed in the prior month. Growth was most
pronounced in clothing and textiles as well as household goods. A
month-on-month comparison corroborates the September acceleration in
activity, as sales rose 0.24% in seasonally adjusted terms, which
represented an improvement from the 0.73% drop registered in August. As
a result of the healthier September reading, the annual average growth
rate rose from 6.1% in August to 6.3%. Private consumption is currently
benefiting from declining unemployment, which dropped from 12.1% in the
second quarter to 11.1% in the third. At its current level, unemployment
is at the lowest point observed in more than ten years. More recent data
suggest that consumption also continues on a healthy trajectory. The
University Torcuato di Tella's (UTDT) national consumer confidence index
(ICC) rose from 50.1 points in October to 53.4 points in November. The
sub-index that measures sentiment about the economic situation in the
short and medium term rose from 56.9 points to 60.1 points in October.
Moreover, the sub-index for durable consumer goods rose to the highest
level observed since January, indicating favourable prospects for
private consumption.
Construction continues on strong expansion path
In October, construction activity rose 19.5% over the same month last
year, which was up from the 19.1% expansion registered the prior month.
Infrastructure and road works experienced the strongest growth rates,
whereas activity in oil-related construction actually dropped compared
to the same period last year. As a result of the healthy October
reading, the positive growth trend in construction continued, as annual
average growth rose from 11.7% in September to 12.7%.
Outlook for economy remains favourable but
continued moderation in the cards
Despite continued resilience in economic growth, Consensus Forecast
panellists expect the expansion in gross domestic product (GDP) to
moderate in the final quarter of the year with growth slowing to a 5.6%
pace over to the same quarter last year. As a result, Consensus Forecast
participants see annual growth at 8.0% for this year, which is up 0.3
percentage points from last month’s Consensus Forecast estimate and
remains above the government’s 7.3% estimate. Economic growth is likely
to be more moderate next year with Consensus Forecast participants
anticipating GDP to expand at much lesser 5.2%, which is up 0.5
percentage points from last month and is well ahead of the government’s
official 4.0% forecast provided in the 2006 budget proposal for
Congress.
Inflation continues on upward spike
In November, consumer prices rose 1.21%, which was up from the 0.78%
increase registered the prior month and well above market expectations
of a 0.60% increase. Rising food and beverage as well as clothing costs
were the key upward drivers behind the November consumer price surge. As
a result of the November figure, annual inflation rose to 12.0% from
10.7% in October – the highest rate registered in more than two years.
At the current level, annual inflation remains well above the upper
limit of the government’s forecast range of 8% to 11%. As a result of
the higher than expected price spike, the government signed an agreement
on 1 December with leading national supermarkets to lower prices by 15%
over the next two months. According to the accord, supermarkets have
agreed to lower prices on food, clothing and personal hygiene products
through 31 January of next year. As a result of the continued upward
momentum of consumer prices, Consensus Forecast participants have again
revised the estimate for annual inflation upward by 0.3 percentage
points from last month to 11.5%. Furthermore, inflationary pressures are
anticipated to moderate only slightly next year, with consumer prices
expected to increase 10.7%, which is up 0.3 percentage points from last
month’s Consensus Forecast estimate.
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