Argentina: Economy rebounds in Q2 on surging exports, but outlook darkens with changed political landscape
Economic activity in the second quarter expanded 0.6% in year-on-year terms, contrasting the 5.8% dive recorded in Q1, according to the Statistical Institute (INDEC). A softer contraction in domestic demand and a jump in exports were behind the improved performance of the economy. On a quarter-on-quarter basis, the economy shrank 0.3% in Q2, following the revised zero growth observed in Q1 (previously reported: -0.2% quarter-on-quarter).
The second quarter’s rebound reflected a softer contraction in the domestic economy, although it nevertheless remained sizable. Stubbornly high interest rates and runaway inflation continued to weigh on activity. Domestic demand sank 7.8% in annual terms, following Q1’s 12.6% dive, with private consumption plunging 7.7% in Q2 (Q1: -9.9% year-on-year) amid rising unemployment, downbeat consumer confidence and elevated price pressures. Meanwhile, fixed investment nosedived 18.0% in the second quarter, although the result represented an improvement over Q1’s 24.5% plunge. A staggering contraction in investment in machinery and transport equipment on the back of vanishing domestic demand was behind the fall. Meanwhile, government consumption declined 1.7% in Q2, a somewhat sharper drop than Q1’s 0.5% contraction. This likely reflected the government’s efforts to cut spending to meet fiscal targets as agreed with the IMF.
A surge in exports together with another sharp contraction in imports drove the external sector’s positive performance. Imports plummeted 22.7% in Q2 (Q1: -25.1% yoy), again reflecting tumbling domestic demand and a weaker peso. Exports, meanwhile, jumped, soaring 15.0% in Q2 (Q1: +1.4% yoy), boosted by rising agricultural production in the quarter.
Argentina’s outlook has deteriorated substantially in our latest LatinFocus due to August’s financial crisis. The changed political landscape prompted LatinFocus Consensus Forecast analysts to drastically revise their expectations this year and the next. The high probability of a Peronist victory at October’s elections has clearly clouded the outlook, re-awakening fears of a potential default and harmful fiscal policies of the past.