Investment in Argentina

Argentina - Investment

Economic contraction softens in Q3

According to the Statistical Institute (Instituto Nacional de Estadísticas y Censos, INDEC), economic activity in the third quarter contracted 3.5% in year-on-year terms on the back of plunging domestic demand. However, this was a softer drop than the 4.0% fall recorded in the second quarter. On a quarter-on-quarter basis, the economy shrank 0.7% in Q3, following the 4.1% plunge observed in Q2, which had marked the most severe contraction in nearly a decade.

The fall in Q3 reflected weakness in the domestic economy. Domestic demand fell 5.0% following Q2’s 1.5% drop, while private consumption swung from Q2’s 0.6% expansion to a notable 4.5% contraction in Q3. Consumer spending was hit by a significant depreciation of the peso and continued subsidy cuts in public utilities, which translated into soaring inflation and ate into consumers’ purchasing power, dragging down consumer confidence. Moreover, fixed investment plummeted 11.2% in the third quarter, strongly contrasting the 2.9% increase recorded in the previous quarter, owing to a sharp contraction in machinery and transport equipment. Meanwhile, government consumption contracted 5.0% in the third quarter, a sharper fall than Q2’s 2.6% decrease. The decline again reflected the government’s intensifying efforts to rein in fiscal spending and reduce the fiscal deficit.

The external sector’s performance, meanwhile, improved in the third quarter, although this was only due to imports contracting at a faster pace than exports. Imports swung from a 3.1% increase in Q2 to a notable 10.2% drop in Q3, reflecting shrinking private consumption and plunging demand for investment goods, as the contraction in exports moderated from 8.5% in Q2 to 5.9% in Q3, thanks to improved agricultural production in the quarter.

The economy will likely remain stuck in recession next year, although the contraction should soften. Strong, albeit moderating, inflationary pressures and rising taxes will eat into consumers’ purchasing power, while high interest rates and shrinking public investment will weigh on fixed investment. That said, the trade balance is set to swing from deficit to surplus, thanks to higher agricultural exports and lower imports, while the fiscal deficit ought to narrow. Downside risks stem from possible capital flight following the Fed’s tightening cycle and the uncertain political outcome in next October’s elections. LatinFocus Consensus Forecast analysts see the economy contracting 0.9% in 2019, down 0.4 percentage points from last month’s estimate, before rebounding to 2.7% growth in 2020.

Argentina GDP Forecast