Argentina GDP Q1 2016


Argentina: Argentina's economy falls into recession in Q1

June 29, 2016

Following a period of data scarcity after President Mauricio Macri’s administration declared a “national statistical emergency” in December, the National Statistical Institute (INDEC) has recently started publishing official GDP data with information on both the supply and demand sides of the economy. According to official data released on 29 June, in the first quarter, the Argentine economy expanded a weak 0.5% over the same quarter of the previous year, which was well below the revised 2.2% increase observed in the previous quarter (previously reported: +0.9% year-on-year). The figure contrasted the 0.6% contraction expected by the FocusEconomics panel. Last month, INDEC also revised last year’s growth rate from a 2.1% increase to a 2.4% expansion. The overhaul of INDEC represents an important step towards the normalization of the country’s statistics as well as the improvement of investor’s confidence.

On a sequential basis, in the first quarter, the economy contracted 0.7% over the previous quarter, which was a deterioration over the 0.7% decrease observed in the previous quarter and marked the third quarter-on-quarter contraction, thus confirming that the economy has entered recession. Argentina’s economy is faltering following the steep depreciation of the currency and the removal of the utility subsidies, which has led to soaring inflation and declining investment.

On the demand side of the economy, in Q1, growth in private consumption decelerated notably from Q4’s 8.0% increase to a 1.1% expansion in Q1, which marked the slowest increase in a year. Moreover, government consumption grew only 2.7% year-on-year, which was down from the 5.6% expansion observed in the final quarter of last year. In addition, fixed investment swung from a 12.0% increase in the fourth quarter to a 3.8% decrease in the first quarter. On the external side of the economy, in Q1, exports rebounded sharply to a 13.1% expansion supported by a weak currency. The figure contrasted the 3.4% drop observed in the previous quarter. On the other hand, growth in imports decelerated slightly from 14.6% in Q4 to 12.2% in Q1. Due to the strong rebound in exports, the external sector’s net contribution to overall growth improved from minus 4.0 percentage points in Q4 to minus 0.6 percentage points in the first quarter.

On the supply side of the economy, Q1’s disappointing figure came on the back of a deterioration in the agricultural sector, which contracted a steep 5.1% (Q4 2015: -1.2% year-on-year). Moreover, the manufacturing industry swung from a 1.0% expansion in Q4 to a 1.6% contraction in Q1. Production in the construction sector decreased 5.2% on an annual basis in the first quarter, which contrasted the 2.6% increase observed in the fourth quarter. Conversely, transport and communication improved in the first quarter and the sector accelerated to a 4.2% increase (Q4: +2.2% yoy). Moreover, the fishing sector also recorded a notable improvement in the first quarter.

In order to improve investor confidence regarding the country’s long-term growth prospects, earlier this month, Macri announced that the government is offering to buy back as much as USD 13.8 billion of GDP warrants sold to creditors back in 2005 and 2010 as part of the debt restructuring process. According to the Finance Ministry, the purchase of these securities, which pay the holders if the economy expands more than 3.0%, will save the government up to USD 9.4 billion.

GDP growth is likely to decelerate further in the following quarters as the economy continues to adjust to the government’s fiscal consolidation measures. Moreover, external threats, such as the prolonged recession in Brazil and subdued commodity prices, are clouding the outlook for this year. However, looking beyond this year’s outlook, growth will likely speed up in the medium to long term amid an improvement in the external sector and the country’s return to international credit markets. The government expects the fiscal deficit to reach 4.8% of GDP this year and 3.3% of GDP next year. LatinFocus panelists are more pessimistic than the government and expect the fiscal deficit to hit 5.2% this year before shrinking to 4.3% in 2017. Our panelists expect the economy to contract 0.9% this year, which is up 0.1 percentage points from last month’s forecast. For 2017, panelists expect the economy to accelerate significantly and expand 2.9%. Moreover, our panel expects non-official GDP to contract 0.7% this year before rebounding and increasing 3.3% in 2017.

Author:, Senior Economist

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