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The four-month long
conflict between farmer unions and the government over an increase in
export taxes for several agricultural goods was finally resolved last
month. On 18 July, President Fernández revoked the proposal after the
Senate had rejected her draft law. Although the outcome has rekindled
consumer and business confidence, the outlook for the economy has
deteriorated further, as both consumption and investment growth are set
to moderate significantly this year amid soaring inflation and
structural energy-shortages. |
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Economy
decelerates in May
In May,
the monthly indicator for economic activity (EMAE, Estimador Mensual de
Actividad Económica) rose 8.0% over the same month last year. The
result was down from the 9.0% growth registered in April but came in
ahead of market expectations, which had the economy growing 7.1%.
Nevertheless, a month-on-month comparison does not corroborate the
deceleration suggested by the annual figures, as the economy expanded a
strong 1.38% over the previous month in seasonally adjusted terms, which
was well above the 0.98% expansion registered in April. As a result of
the monthly reading, annual average growth in economic activity
moderated slightly from 8.8% in April to 8.7%.
Farmer
strike ends as government revokes export tax increase
Despite
relatively strong first quarter results, the outlook for the economy in
the remainder of the year is steadily deteriorating. The more sombre
perspectives are particularly due to weaker prospects for the domestic
sector, as both consumption and investment are set to decelerate
compared with last year’s strong pace. Recent data for industrial
production corroborate the more subdued economic picture and suggest
that in the second quarter, economic activity moderated compared with
the preceding quarter. In June, industrial production expanded a meagre
1.8% over the same month last year. As a result of the June reading,
industrial production increased 5.5% in the second quarter, which was
down from the 6.6% annual expansion registered in the first quarter. On
a positive note, the conflict between farmers’ unions and the government
over the increase of export taxes on several commodities, which had been
disrupting agricultural production and exports for four months, came to
an end in July as the Senate rejected the presidential proposal for the
tax increase. As a result, President Cristina Fernández was forced to
revoke the decree and reinstate the level of export taxes previously in
place. Moreover, as a consequence of the defeat in Congress, the
president has replaced several ministers. Most importantly, Alberto
Fernández was dismissed as chief of cabinet and replaced by Sergio
Massa, the former head of the social security agency. Consumer
confidence has responded favourably to the resolution of the farming
conflict, as the consumer confidence index (ICC) published by the
Universidad Torcuato di Tella (UTDT) rose 2.2% over the
previous month, from 39.6 points in June to 40.5. The increase mainly
reflected strongly improved perspectives of the macroeconomic situation
of the country. Although the index still remains under the 50-point
threshold that separates optimism from pessimism, the result constituted
the first significant rise in consumer confidence in six months.
Meanwhile, on 30 July, the government raised electricity prices in
Buenos Aires for the first time in seven years. Planning Minister Julio
de Vido stated that the extra revenues will be used to fund long overdue
investments in the energy sector. Although the price increase may
undermine already the weak popular support for the government and add to
price pressures in the short term, the move will help to correct
distortions in the energy market. Energy prices had been frozen since
the 2001-2002 economic crisis, which periodically resulted in severe
supply constraints. The government expects the economy to expand 7.0%
for the full year, which is far above
the 4.5% initially estimated in this year’s budget. Consensus
Forecast panellists are increasingly pessimistic and expect economic
growth to reach 6.1% this year, which is 0.2 percentage points down from
last month’s forecast. Next year, Consensus Forecast participants
foresee economic growth to moderate to 4.1%.
Inflation inches up
In June, consumer prices added
0.64% over the previous month. The result was above the 0.60% price
increase observed in May but was in line with market expectations. The
monthly price increase was primarily driven by higher prices for
household equipment as well as for education. As a result of the June
reading, annual headline inflation inched up from 9.1% in May to 9.3%,
which marked the fifth consecutive monthly increase and lifted inflation
to the highest rate since February 2007. However, the official inflation
data published by the National Statistics Institute (INDEC) have been
met with suspicion ever since the controversial change in the
methodology to measure price variations implemented at the beginning of
2007. The new consumer price index, which was introduced in May of this
year, has not been able to dispel the suspicions, as the official
inflation figures continue to be well below estimates of various
independent analysts, which currently estimate annual inflation to range
between 20% and 25%. Consensus Forecast panellists see inflation at 9.7%
by year end. Next year, participants estimate inflation to reach 11.7%.
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