Economy records sharpest contraction since Q2 2023 in Q1

GDP fell at a quicker pace of 5.1% on a year-on-year basis in the first quarter, below the 1.2% contraction recorded in the fourth quarter of last year and marking the sharpest drop since Q2 2023. The reading was closely aligned with our panelists’ expectations. On a seasonally-adjusted quarter-on-quarter basis, GDP declined 2.6% in Q1, following the previous quarter's 2.5% fall and marking the largest downturn since Q2 2020.

Triple-digit inflation and the government’s austerity drive weighed on multiple expenditure components in Q1. Household spending slid at a sharper pace of 6.7% year-on-year in Q1 from a 1.9% contraction in Q4. Public consumption dropped at the sharpest pace since Q2 2020, contracting 5.0% (Q4 2023: -1.1% yoy). Meanwhile, fixed investment contracted 23.4% in Q1, marking the worst reading since Q2 2020 (Q4 2023: -6.8% yoy). Exports of goods and services bounced back, growing 26.1% in Q1 (Q4 2023: -7.4% yoy), thanks largely to strong agricultural output. Conversely, imports of goods and services contracted at a sharper pace of 20.1% in Q1 (Q4 2023: -1.8% yoy).

Our Consensus is for the economy to continue contracting in year-on-year terms for the remainder of this year, and to only return to quarter-on-quarter growth in H2, as inflation gradually subsides. The passage of the omnibus reform bill in June bodes well for the economic outlook, as it relaxes labor laws and encourages foreign investment.

Giving their take on the outlook, Itaú Unibanco analysts said: “Our 2024 GDP growth forecast stands at -3.0%. Following the sharp contraction in economic activity in 1Q24, all eyes are now on the pace of the recovery. While small, the sequential contraction at the start of 2Q24 confirms the downside bias to our projection.” Goldman Sachs’ Sergio Armella said: “Growth will remain weak in 2024 amid a macro rebalancing process where a sizeable fiscal drag and an erosion of households' disposable income is taking place […] A much stronger harvest, in contrast to the poor agricultural production of 2023, should provide some support to activity in the coming months. Thereafter, as inflation moderates, positive real wage growth in the second half of the year could support consumption and activity.” Regarding the passage of the omnibus bill, EIU analysts said: “The passage […] is a major step in improving Argentina’s poor business environment, but investors are unlikely to commit to investing in Argentina until the government articulates a clear road map to lift currency and capital controls (we believe that they will be lifted by early 2025). Legislatively, the difficulty in passing these laws demonstrated that the government is very likely to delay wide-ranging economic reforms further until the midterm election in late 2025.”

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