Investment in Argentina

Argentina - Investment

Economic contraction softens in Q1 but remains excruciating

Economic activity in the first quarter plummeted 5.8% in year-on-year terms, according to the Statistical Institute (INDEC). The result represented an almost negligible improvement compared to the revised 6.1% dive recorded in Q4 2018 (previously reported: -6.2% year-on-year), which had marked the weakest reading in over nine years. On a quarter-on-quarter basis, the economy shrank 0.2% in Q1, following the revised 1.3% drop observed in Q4 (previously reported: -1.2% quarter-on-quarter).

The first quarter’s tumble reflected another massive contraction in the domestic economy, which was hit by a marked devaluation of the peso, sky-high interest rates and runaway inflation. Domestic demand sank 12.4% in annual terms following Q4’s 13.8% drop, with private consumption plunging 10.5% in Q1 (Q4: -9.4% year-on-year) amid rising unemployment, a notable depreciation of the peso and continued subsidy cuts to public utilities. This once more translated into escalating inflation, which eroded consumers’ purchasing power and weighed on consumer confidence in turn. Moreover, fixed investment nosedived 24.6% in the first quarter, virtually matching Q4’s 24.4% fall, owing to a sharp contraction in machinery and transport equipment due to languishing domestic demand. Meanwhile, government consumption declined a meagre 0.3% in Q1, a markedly softer drop than Q4’s 5.3% contraction. This likely reflected the government’s slackening efforts to cut spending in an election year.

Markedly contracting imports continued to drive the external sector’s positive performance, outweighing a significant cooling of export growth. Imports plummeted 24.6% in Q1 (Q4: -24.6% yoy), reflecting tumbling domestic demand and the much weaker peso. Exports, meanwhile, recorded a timid 1.7% expansion in Q1 (Q4: +7.8% yoy), sustained by rising agricultural production in the quarter.

The economy will remain mired in recession this year, as sky-high interest rates, runaway inflation and nosediving public investment erode domestic demand. That said, a bumper agricultural harvest will partially cushion the downturn, which, together with shrinking domestic demand and a cheaper peso, should sizably reduce the current account deficit. The uncertain outcome of this October's elections, reigniting financial turbulence and exacerbating global trade tensions represent the main downside risks to the outlook.

Argentina GDP Forecast

LatinFocus Consensus Forecast analysts see the economy contracting 1.3% in 2019, which is unchanged from last month’s estimate, before expanding 2.1% in 2020.