Argentina: Economy falls back into contraction in Q3 on sinking domestic demand
Economic activity in the third quarter slumped 1.7% year-on-year, following the flat result recorded in Q2, according to the Statistical Institute (INDEC). Another sizable contraction in domestic demand and somewhat softer support from the external sector were behind the gloomy performance. On a quarter-on-quarter seasonally-adjusted basis, the economy rebounded 0.9% in Q3, contrasting the 0.7% drop observed in Q2.
The third quarter’s downturn reflected another sharp contraction in the domestic economy. Sky-high interest rates, August’s peso selloff and runaway inflation weighted on activity. Domestic demand sank 7.9% in annual terms, following Q2’s 8.4% dive, with private consumption shrinking 4.9% in Q3 (Q2: -8.2% year-on-year) amid rising unemployment, abysmal consumer confidence and roaring inflation. Meanwhile, fixed investment plunged 10.2% in the third quarter, although less severely than Q2’s 18.3% nosedive. A significant contraction in investment in machinery and transport equipment was again behind the fall. Meanwhile, government consumption dipped 0.9% in Q3, a softer drop than Q2’s 1.9% contraction, reflecting the government’s continued efforts to cut spending to meet fiscal targets as agreed with the IMF.
While the external continued to support growth, a somewhat smaller surge in exports and a less pronounced contraction in imports limited the contribution. Imports fell 13.4% in Q3 (Q2: -22.4% yoy), again reflecting plummeting domestic demand and a tumbling peso. Exports, meanwhile, jumped14.2% in Q3 (Q2: +15.4% yoy), boosted by rising agricultural production in the quarter.
Next year, the economy will likely remain trapped in recession. Investor concern related to the new government, coupled with sky-high inflation and interest rates, will depress investment and spending, only partly compensated by a solid external sector. The risk of a disorderly debt write-off and unsustainable policies further cloud the outlook.