Argentina: 2018 economic outlook remains uncertain despite strong growth in Q4
According to the Statistical Institute (Instituto Nacional de Estadísticas y Censos, INDEC), economic activity in Q4 edged up from a revised 3.8% annual increase (previously reported: +4.2% year-on-year) in Q3 to 3.9%. The print marked the fourth consecutive quarter of growth and the fastest rise since Q2 2015. The fourth-quarter print also surprised market analysts, who had expected a softer 3.6% increase. The acceleration was driven by the domestic economy, which continues to strengthen as pro-market reforms bear fruit. On a quarter-on-quarter basis, economic growth accelerated from 0.8% in the third quarter to 1.0% in the fourth quarter. Q4’s print marked the sixth consecutive quarter-on-quarter rise.
The domestic economy was the main engine of growth in the fourth quarter. The increase in private consumption quickened from a 4.2% expansion in Q3 to 4.8% in Q4, supported by declining unemployment (Q4: 7.2%; Q3: 7.9%) and improving consumer confidence. Fixed investment surged from a 13.0% rise to 20.7% in the fourth quarter on the back of double-digit increases in construction, machinery and equipment, and transportation equipment. The strong expansion in these components attests to the recovery in industrial production, which in 2017 grew at the fastest pace since 2011. Government consumption growth, on the other hand, decelerated from a 1.8% increase in the third quarter to 1.4% in the fourth quarter as it reined in public spending.
The external sector had an abysmal performance in the fourth quarter, as imports surged and exports barely grew. Growth in imports accelerated from a sharp 18.3% rise in Q3 to 21.7% in Q4, while exports grew a paltry 0.4% (Q3: +2.6% year-on-year). The surge in imports reflects in large part stronger for consumer goods as private consumption strengthens, and demand for intermediate goods from industry. Similarly, restrictive monetary conditions by the Central Bank have converted Argentine assets and equities into sought-after investments, which has contributed in pushing imports higher. Exports, on the other hand, remain weak, reflecting an overvalued currency, existing trade barriers, and sluggish growth in export-oriented sectors.
The Q4 reading pushed full-year GDP growth to 2.9%, the fastest expansion since 2011. Despite the notable improvement, the mood concerning the economy is somber. The latest data shows that inflation remains stubbornly high, and the external sector continues to be a weak spot. In addition, the removal of subsidies in public utilities in Q1 and a depreciation of the currency after the Central Bank eased inflation targets in late December will weigh on private consumption this year. A devastating drought in the country’s agricultural region in the first quarter will furthermore hit the agricultural and external sectors.
More troublingly, Argentina’s macroeconomic stability in the medium-term is becoming more uncertain as economic imbalances build. The current account balance is widening, as the country is running a persistent trade deficit and the government keeps borrowing from international lenders to finance fiscal spending. Similarly, restrictive monetary conditions by the Central Bank have converted Argentine assets and equities into sought-after investments, which has contributed in pushing imports higher..The fiscal deficit remains extremely elevated, despite ongoing efforts to keep spending in check. Prospects of growing current account and fiscal deficits are worrying, as they could derail President Macri’s efforts to reform the economy.