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Economy
decelerates in second quarter
In June,
the monthly indicator for economic activity (EMAE, Estimador Mensual
de Actividad Económica) rose 6.5% over the same month last year.
The result was down from the 8.0% registered in May but in line with
market expectations, which had the economy growing 6.6%. A
month-on-month comparison points towards an even sharper deceleration
that suggested by the annual figures, as the economy contracted 0.84%
over the previous month in seasonally adjusted terms, which contrasted
the 1.44% increase registered in May. Based on the monthly data, the
economy expanded 7.8% annually in the second quarter, which constitutes
a deceleration compared to the 8.4% expansion registered in the first
quarter of the year. Annual average growth in economic activity dropped
from 8.7% in May to 8.5%.
Government to pay defaulted debt to Paris Debt club in attempt to
rekindle investor confidence
Preliminary results for second quarter GDP growth suggest that the
economy continues to decelerate. However, in the short term, the
slowdown is likely to be moderate and economic growth will maintain a
relatively healthy pace at least this year, underpinned by robust
private consumption and a strong external sector, which thrives on high
international commodity prices. Private consumption should benefit from
the recent recovery in consumer confidence in the wake of the resolution
of the farming conflict. In August, consumer confidence improved for
the second consecutive month, as the consumer confidence index (ICC)
published by the Universidad Torcuato di Tella (UTDT) rose
from 40.5 points in July to 41.4. The increase mainly reflected
improving perspectives of the country’s macroeconomic situation.
Although the index still remains under the 50-point threshold that
separates optimism from pessimism, the two consecutive monthly
improvements effectively end the deteriorating trend that had been in
place since February. Despite the rather favourable short-term outlook,
significant downward risks exist. Most importantly, amid persistent
controversy about official inflation data and decelerating economic
growth, foreign investor confidence in the government and its
willingness to pay off foreign debt is eroding. Consequently,
international rating agencies Standard & Poor’s and Moody’s recently
downgraded their assessment of the country. Standard & Poor’s cut its
foreign debt rating for Argentina from B+ to B, which is five levels
below investment grade and in line with countries like Paraguay and
Jamaica. The agency cited high and underreported inflation as well as
the apparent lack of willingness of the government to adjust its fiscal
policy as reasons for the adjustment. Moody’s adjusted the country’s
debt outlook from positive to stable, arguing that the lack of credible
official inflation data together with falling state revenues raise
questions about the government’s willingness and ability to meet the
country’s debt obligations. In an attempt to restore investor
confidence, President Cristina Fernández recently announced that the
government will use foreign exchange reserves to pay off the US$ 6.7
billion in defaulted debt with the Paris Club. The government expects
the economy to expand 7.0% in 2008, which is
far above the 4.5% initially estimated in this year’s
budget. Consensus Forecast panellists see economic growth reaching 6.2%
this year, which is 0.1 percentage points up from last month’s
forecast. Next year, Consensus Forecast participants foresee economic
growth to moderate markedly to 4.1%.
Inflation moderates in July
In July,
consumer prices added 0.37% over the previous month. The result was
below the 0.64% price rise observed in June and undershot of market
expectations, which had prices adding 0.80%. Analysts had expected a
more pronounced price increase in July following on the recent hikes in
electricity tariffs and the prolonged farmers’ conflict, which until mid
July had been severely affecting food supplies. However, prices for
food and beverages in fact dropped in July and thus compensated for
higher prices in all other categories. As a result of the subdued
monthly reading, annual headline inflation inched down from 9.3% in June
to 9.1%, ending a five months string of accelerating inflation, which
lifted inflation by more than a full percentage point since the
beginning of the year. 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 used 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 and various independent analysts see
actual inflation well above the official inflation figures, with
estimates for annual inflation ranging between 20% and 30%. Consensus
Forecast panellists see inflation at 9.6% by year end, which is 0.1
percentage points down
from
last month’s estimate. Next year, participants estimate inflation to
reach 11.8%.
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