Economic Analysis - Rebound Set To Broaden - MAY 2018

BMI View: Argentina's economic rebound will accelerate and broaden in 2018, led by investment and consumption. While a severe drought will undermine agricultural production, risks to the broader economy are relatively contained.

  • Argentine economic activity will gain steam in 2018, led by investment and consumption.
  • Progress on President Mauricio Macri's reform agenda will bolster business confidence, supporting private sector capacity expansion.
  • However, a severe drought has undermined soybean production. As a result, we have downgraded our real GDP growth forecast for 2018 to 3.1%, from 3.3% previously.
  • We estimate growth at 2.8% in 2017, a downgrade from 2.9% previously ( see 'Improving Confidence Supports Growth Outlook', November 29 2017), as quarterly figures suggest public consumption came in below our expectations.
Rebound Remains Strong
Argentina - Monthly Economic Activity, % y-o-y
Source: INDEC, BMI

Investment will underpin growth over the coming quarters. Public-led infrastructure projects continue to drive the rebound, with fixed capital formation expanding 13.9% y-o-y in Q317. Construction activity grew 19.0% in January, its 11th consecutive month of double-digit growth. Over the coming quarters, infrastructure investment will remain central to growth, supported by a nascent public-private partnerships programme.

Construction Still Leading The Way
Argentina - Sector Activity Indicators, % y-o-y
Source: INDEC, BMI

Private sector investment will also pick up into a broad range of sectors. We are positive on agribusiness, autos, energy, pharmaceuticals and food & drink, which our industries teams have identified as among the region's brightest growth prospects given market size and resources ( see 'Latam: Which Industries Are Most Attractive?', August 23 2017). Crucially, the October mid-term elections eased investor concerns over the durability of Macri's reforms. The enactment of pension and tax reforms in December, and progress on labour and capital markets reform over the coming quarters, will help lower the cost of doing business and support the country's long-term growth outlook ( see 'Labour And Political Reforms Set To Advance', February 28).

An improving regional economy will have positive spill-over benefits for Argentine industries. A recovery in Brazil and solid growth in Chile and Uruguay has supported regional demand for Argentine exports and underpinned planned investments into productive capacity, such as in the autos industry. Industrial production growth has picked up since Q217, averaging 3.6% y-o-y in H217 and expanding 2.6% in January. That said, capacity utilisation remains low at only 64.0% in December, suggesting a sizable output gap to be filled that may reduce investment in new capacity over the coming months.

Private consumption will increasingly drive growth over the coming quarters. In Q317, private consumption grew 4.2% y-o-y, and monthly retail sales growth picked up in Q417, averaging 19.2% y-o-y. Although inflation remains elevated and pension reforms have weighed on consumer sentiment, decelerating inflation and rising incomes will support stronger sentiment. We forecast inflation will fall from 25.0% y-o-y in January to 16.1% by end-2018, supporting interest rate cuts that will offer tailwinds to consumer credit growth ( see 'Cautious Rate Cuts Amid Looser Inflation Targets', January 12). Investment will also support employment gains, bolstering household incomes. That said, negotiated wage increases due over the coming months could pose headwinds, as the government seeks to curtail inflation by capping wage hikes.

Confidence Likely To Improve As Inflation Decelerates
Argentina - Consumption Indicators
Source: INDEC, BMI

An extended drought will weigh on the agricultural sector over the near-term. A four month drought is now considered the most severe in 30 years, and will reduce this year's harvests of soybeans and maize ( see 'Key Implications Of Ongoing Soy Rally', February 28). While the drought has driven a rally in soybean prices that will offer some support to the sector's income, the lost production will negatively impact real export growth. Though we do not anticipate significant spill-over effects, downside risks are growing. Notably, a severe drought in 2012 pushed the economy into recession. That said, the liberalisation of the country's external accounts has made it less reliant on agricultural exports to generate hard currency, mitigating risks.