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Lower unemployment and improved consumer confidence are
keeping private consumption on a strong growth trajectory, while
investment growth remains healthy despite mounting economic policy
uncertainty. Nevertheless, high and rising inflation is casting a
shadow over the healthy growth story and monetary authorities will have
to act to stem rising inflationary expectations. |
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Economic growth robust amid healthy domestic
demand
In the third quarter, gross domestic product (GDP) expanded 9.2% over
the same period last year. The third quarter reading was below the 10.4%
expansion registered the prior quarter but exceeded last month’s 8.7%
Consensus Forecast figure. Stellar domestic demand growth accounted for
the third quarter growth spurt, as both investment and consumption
remained strong. A quarter-on-quarter comparison does not confirm the
slowdown implied by the annual figures, as economic growth increased
2.32% over the third quarter.
Economic activity accelerates
Economic growth remained robust entering the final quarter of the year.
According to the National Statistical Institute (INDEC), the monthly
indicator for economic activity (EMAE, Estimador Mensual de Actividad
Económica) increased 9.3% in October over the same month last year. The
October reading was virtually unchanged compared to the 9.2% expansion
observed the prior month. Seasonally adjusted data indicate that
activity continued to grow at a robust pace, as the EMAE rose 0.76% over
the prior month, which was down moderately from the 1.15% increase
observed in September. As a result of the healthy October reading, the
annual average growth rate in economic activity rose from 9.2% in
September to 9.4%,
Optimism about growth prospects persists
Continued healthy growth through the end of last year prompted the
Central Bank to revise its growth forecast for 2005 upward from 7.3% to
8.7%. The new estimate remains below the official government forecast of
9.2% to 9.3% growth but is ahead of the 8.4% Consensus Forecast estimate
- also revised upward 0.4 percentage points from last month.
Furthermore, monetary authorities are confident that growth will
moderate at higher levels this year with economic activity expected to
reach 6.2%, which is ahead of the government’s 4.0% estimate in the 2006
Budget and the Consensus Forecast figure of a 5.5% expansion (December
Consensus Forecast: 5.2% year-on-year).
Inflation continues under pressure
In December, consumer prices rose 1.11%, which was below the prior
month’s 1.21% reading but in line with Consensus Forecast expectations.
Entertainment, health, transport and communications prices accounted for
the lion share of the December increase. As a result of the pronounced
December price rise, annual inflation continued on the upward trend
observed since June of last year, rising from 12.0% in November to
12.3%. Thus, inflation for 2005 came in well ahead of the upper limit of
the government’s official forecast of 8% to 11%. Prices are likely to
moderate in January, following the government’s agreement on 1 December
with major national supermarkets to cut prices by 15% on 230 products of
through 31 January. Nevertheless, consumer price pressures are likely to
persist this year, as Consensus Forecast participants expect annual
inflation to reach 11.7%, which is up 0.9 percentage points from last
month and ahead of the Central Bank’s 8% to 11% monetary policy target.
Government retires IMF debt
On 4 January, the government retired the total US$ 9.9 billion of debt
outstanding with the International Monetary Fund (IMF) under the terms
of the existing Stand-by Agreement. International reserve levels and the
continued strength in the currency last year provided the necessary
funds to pay off the obligations. At the end of December, international
reserve levels reached US$ 28.1 billion, which was up 44.0% from the
prior year. The debt retirement enables the government to free up
economic policies from what are perceived as overly onerous IMF demands.
Fund officials had hoped to convince the government to negotiate with
private public utility companies to lift tariffs that have been frozen
for three years. In addition, the IMF wanted the government to commit to
continued fiscal discipline and a re-opening of discussions with private
creditors that did not participate in the government’s defaulted debt
restructuring concluded in June 2004. Continued investor confidence – a
key to the sustainability of the current economic rebound – will hinge
on the government’s commitment to monetary and fiscal policy discipline.
If the government’s decision to repay the IMF debt is perceived as a
means towards embarking on a more populist and heterodox economic policy
path, investment growth is likely to suffer and economic growth will
remain below potential.
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