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Economy
expands at slowest pace in four years
In the
second quarter, gross domestic product (GDP) expanded 7.5% over the same
quarter last year. The result was down from the 8.3% growth observed in
the previous quarter and also fell short of market expectations, which
had the economy expanding 7.9%. Moreover, the figure represented the
slowest growth pace in four years. The deceleration compared to the
previous quarter was broad-based, as both the domestic and the external
sector expanded at a slower pace. Private consumption growth
decelerated from 8.2% annual growth in the first quarter to 7.5%, while
investment decelerated more markedly, from 20.3% to 12.4%. Meanwhile,
the net contribution of the external sector to overall growth
diminished, as exports decelerated sharply, while import growth
accelerated a notch. Exports turned from a 6.1% expansion in the first
quarter into a 1.8% contraction, which constituted the first negative
reading in four years. The weak export performance can be largely
explained by the prolonged conflict between farmers and the government,
which was only resolved in July and had been paralysing the production
and transportation of most of the country’s main export commodities for
over four months. Imports, on the other hand, continued to grow at a
resilient pace, expanding 22.8% annually (Q1: +22.1% year-on-year). As
a result, the net contribution from the external sector to overall
economic growth deteriorated from -2.1 percentage points in the first
quarter to -3.0 percentage points. At the sector level, the
deceleration over the previous quarter was underpinned by slower growth
in all three main economic sectors – agriculture, industry and
services. In particular, agriculture shifted from a 1.1% expansion in
the first quarter to a 1.4% contraction in the second. A
quarter-on-quarter analysis does not corroborate the deceleration
suggested by the annual figures, as GDP grew a robust 2.11% over the
previous quarter in seasonally adjusted terms.
Economy
to decelerate next year
After
having expanded at the slowest pace in four years during the second
quarter, the economy grew a surprisingly robust 8.3% in July and the
outlook for economic growth for the remainder of the year remains
stable, underpinned by favourable short-term prospects for both private
consumption and exports. However, a combination of external factors and
several structural bottlenecks are set to severely constrain economic
growth in the coming year. The global economic slowdown will curtail
external demand and lower prices for commodities, thus affecting
Argentina’s export revenue. Already in September, prices for soybeans,
one of Argentina’s most important export products, fell 8.6% over the
previous month. On a positive note, only 7.3% of the country’s exports
go to the United States, which shields Argentina’s economy to some
extent from the slowdown in the most heavily affected economy. Next to
negatively affecting demand for commodities, the global economic
slowdown is likely to take its toll also on the domestic side of the
economy, mainly through the evaporation of confidence in the Argentine
peso. The rapid depreciation of the currency seen in the past
weeks not only threatens to affect savings and discourage foreign
investment, but could also fuel already high inflation, thus hampering
prospects for private consumption. In an attempt to jointly contain
possible negative effects of the global economic turmoil, President
Fernández is seeking to meet with regional leaders, in particular with
Brazilian President Lula da Silva. As the Brazilian real is
plummeting, Argentina fears a rapid increase of imports from the fellow
Mercosur member, which could weigh on its national industry.
Nonetheless, government sources have stated that the administration will
not resort to protectionist measures without previously consulting with
the Brazilian government. According to the budget proposal, the
government expects the economy to expand 6.6% this year and a markedly
slower 4.0% in 2009. Consensus Forecast panellists are increasingly
optimistic about this year’s growth prospects and expect economic growth
to reach 6.4% this year, which is 0.2 percentage points up from last
month’s forecast. Next year, however, Consensus Forecast participants
foresee economic growth to moderate sharply to 3.8%, which is 0.3
percentage points down from last month’s forecast.
Confidence in country slides
Argentina’s fiscal and current account surpluses provide its economy
with some cushion against external shocks. Against that backdrop, the
government has repeatedly stated that the economy is in good shape to
weather the current financial turmoil. However, the country’s large
foreign reserves have been rapidly declining in the past months, as the
Central Bank has been selling large amounts of US$ to support the
peso. Furthermore, despite the country’s still comfortable reserves
position, confidence in Argentine assets is rapidly declining, which
could complicate the country’s access to foreign capital. In the first
ten days of October, the Buenos Aires stock market index Merval
lost 23.9% of its value, which brings the total year-to-date loss to
43.5%. Furthermore, the spread of Argentine bonds over comparable U.S.
treasury bonds, rose 405 basis points in the first ten days of October
alone. On a positive note, the government recently announced that it is
seeking a new restructuring deal with holders of bonds on which
Argentina defaulted in 2001. If the restructuring is successful, this
could help normalise the country’s relationship with
international capital markets to some extent.
Inflation moderates in September
In
September, consumer prices added 0.51% over the previous month. The
result was largely unchanged from the 0.47% price increase observed in
August and, once again, beat market expectations, which had prices
adding 0.80%. In particular, higher prices for clothing as well as for
health care drove the monthly price rise. Owing to the moderate price
increase in September, annual headline inflation fell from 9.0% in
August to 8.7%. 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, as the official inflation figures continue to be
well below estimates of various independent analysts, with estimates for
annual inflation currently ranging between 20% and 30%. In the short
term, several diverging factors will affect the development of
inflation. On the one hand, falling commodity prices in the wake of the
global economic downturn will help to ease price pressures. On the
other hand, the recent weakening in the Argentine peso, could
trigger a substantial rise in the cost of imports, if the depreciating
trend is not reverted. The government expects inflation to average 8.0%
both this year and the next. Consensus Forecast panellists see official
inflation at 9.3% by year end, which 0.3 percentage points
from last month’s estimate. Next year, participants estimate official
inflation to reach 12.1%.
However, a smaller sample of panellists estimates
actual inflation to total 23.6% this year and 23.5% in 2009.
Current
account deteriorates in second quarter
In the
second quarter, the current account incurred a surplus of US$ 894
million. The result was well below both the US$ 2.4 billion surplus
registered in the same quarter the year before and the US$ 1.4 billion
surplus observed in the first quarter (previously reported: US$ 1.6
billion). The deterioration compared to the previous quarter was almost
entirely due to a smaller trade surplus, which shrank from US$ 3.6
billion to US$ 2.9 billion. The trade surplus diminished as export
growth decelerated markedly compared to the previous quarter, whereas
imports accelerated. Export growth plummeted from 41.7% annual growth
in the first quarter to 27.8%, while imports accelerated from 39.3% to
49.7%. The slowdown in exports
can be largely explained by the prolonged conflict between farmers and
the government, which had paralysed the production and transportation of
most of the country’s main export commodities between March and July.
As a result of the weaker second quarter reading, the moving annual
current account surplus shrunk from US$ 7.5 billion in the first quarter
to US$ 6.0 billion.
Consensus
Forecast participants anticipate the annual current account surplus will
fall to US$ 6.0 billion this year. Next year, panellists anticipate the
current account surplus to shrink further to US$ 3.2 billion.
Peso
reaches lowest level in over 5 years amid global financial crisis
In
September, the exchange rate depreciated 3.2% in nominal terms over the
previous month to reach 3.13 pesos to the US$, which represented
the sharpest monthly decline since October 2005. Moreover, in the first
10 days of October, the currency lost an additional 3.8% of its value,
reaching 3.26 pesos to the US$, which represented the lowest
level since January 2003. Like most emerging market currencies, the
peso is being affected by the global financial turmoil, which has
induced investors to withdraw funds from riskier markets to seek refuge
in assets considered more stable. In an attempt to support the currency
by increasing the attractiveness of peso deposits, the Central
Bank raised interest rates on its repurchase agreements in the beginning
of September. In addition, the Central Bank has been actively
supporting the peso by selling large amounts of its dollar
reserves. Currently, Consensus Forecast panellists expect the currency
to appreciate to 3.19 pesos to the US$ by the end of the year.
For 2009 the panel sees the currency falling again to 3.38 pesos
to the US$.
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