Investment in Argentina

Argentina - Investment

Economic contraction sharpens in Q4 2018

According to the Statistical Institute (Instituto Nacional de Estadísticas y Censos, INDEC), economic activity in the fourth quarter plummeted 6.2% in year-on-year terms, the weakest result in over nine years. On a quarter-on-quarter basis, the economy shrank 1.2% in Q4, following the 0.5% drop observed in Q3. The fourth-quarter’s print therefore means GDP for 2018 as a whole contracted a notable 2.5%, in sharp contrast from 2017’s healthy expansion.

The fall in Q4 reflected a huge contraction in the domestic economy and was also heavily affected by the sharp devaluation of the peso in late August and by the resulting jump in interest rates and financial turmoil. Domestic demand tumbled 14.8% following Q3’s 5.0% drop, with private consumption plunging 9.5% in Q4 following Q3’s 5.4% contraction. Consumer spending was hard hit by high unemployment, the lagged effects of a staggering depreciation of the peso in late August and continued subsidy cuts in public utilities. This translated into escalating inflation and eroded consumers’ purchasing power, dragging down consumer confidence in turn. Moreover, fixed investment nosedived 25.0% in the fourth quarter, following a softer 11.7% fall recorded in the previous quarter, owing to a sharp contraction in machinery and transport equipment. Meanwhile, government consumption contracted 5.1% in Q4. This followed Q3’s 4.2% contraction and again reflected the government’s intensifying efforts to rein in fiscal spending and reduce the fiscal deficit.

The external sector’s performance, in contrast, improved substantially, thanks to both a notable contraction in imports and a solid expansion in exports. Imports declined 26.1% in Q4 (Q3: -10.2%), reflecting shrinking domestic demand and the much weaker peso. Exports, meanwhile, rebounded to a 10.4% expansion in Q4 (Q3: -6.2%), thanks to improved agricultural production in the quarter.

The economy should gradually leave recession behind this year, while rising agricultural output and shrinking domestic demand should sizably reduce the current account deficit. That said, high inflation and interest rates will weigh on consumer spending and fixed investment, with a notable contraction in public investment hitting the latter. The uncertain result of October’s elections and a global slowdown are the main downside risks to the outlook.

Argentina GDP Forecast

LatinFocus Consensus Forecast analysts see the economy contracting 1.1% in 2019, down 0.1 percentage points from last month’s estimate, and expanding 2.5% in 2020.