Argentina: Economy returns to growth in Q1, leaving behind the ghosts of the recession
June 22, 2017
Argentina’s economy seems to have turned a corner, registering a 0.3% annual expansion in Q1. Although this only represents tepid growth, it is a significant turnaround from Q4’s 1.9% fall and marks the first quarter of year-on-year growth after three consecutive quarters of notable drops. While the Q1 print is undeniably good news, it will be hard to meet the 3.5% annual growth target included in the government’s 2017 budget. The economy is still struggling to fully adapt to some necessary yet painful measures passed by the current administration, such as scrapping energy subsidies and public spending cuts. Side effects of these measures prompted inflation to skyrocket and served to weaken the economy last year. The reading is nevertheless a clear sign that the Macri administration’s efforts to tackle problems built up over the previous decade through measures such as tax cuts, deregulation and the elimination of currency controls for sectors such as agriculture and banking, are bearing fruits.
Strengthening domestic demand was one key factor behind the first quarter result. Despite stubbornly-high inflation, which came on the back of higher regulated prices, and rising unemployment in the first quarter, private consumption swung from a 2.4% year-on-year contraction in Q4 to a 0.9% expansion in Q1. This bodes especially well for household spending in the following quarters, as inflation has already begun to drop substantially and the notable wage increases, which will most likely result from oncoming paritarias (annual collective bargaining agreements), will sustain real wage purchasing power. The persistently high-interest-rate environment does not seem to have taken too high a toll on fixed investment, which instead likely benefited from Macri’s market-friendly economic reform plan to reignite investors’ interest in Argentina. After plunging 5.9% in Q4, fixed investment swung to a respectable 3.0% expansion in Q1; it was also fueled by the government’s infrastructure investment plan. Lastly, the government’s focus on reducing the fiscal deficit doesn’t appear to have negatively affected public spending, as government consumption swung from a 2.0% contraction in Q4 to a 1.0% expansion in Q1. The result is the largest increase in one year and was likely fueled by the approaching of next October’s parliamentary elections.
While the domestic economy is reporting positive numbers, the external sector showed some weakness. Depressed by a stronger peso and by the difficult economic situation of Brazil, its main export destination, exports dropped 1.8% in the first quarter (Q4 2016: +7.7% year-on-year). On the other hand, due to the recovering domestic demand, imports registered a stronger expansion than in the previous quarter (Q1: +4.3% yoy; Q4 2016: +3.5% yoy). Consequently, the external sector’s contribution to growth swung from plus 0.9 percentage points in Q4 to minus 1.4 percentage points in Q1, the weakest reading in three quarters
On a sequential basis, the economy grew 1.1% compared to the previous quarter, the third consecutive quarter of growth as well as the highest reading since Q2 2015 (Q4 2016: +0.7% quarter-on-quarter). This has made chances of another technical recession less likely and bodes well for Macri’s approval ratings ahead of October’s parliamentary elections. The economy is expected to accelerate in the upcoming quarters and should return to growth in 2017. The expansion should come on the back of a solid recovery in the agricultural, construction, financial and food processing sectors, which will spur fixed investment, while declining inflation, rising wages and a more upbeat consumer sentiment are expected to underpin household spending.