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The economy is in a freefall. Meanwhile, the
Duhalde government is far from completing an agreement with the
International Monetary Fund (IMF), which is seen as key to stabilizing
the domestic financial system and bolstering the economy. Completion of
the negotiations will hinge on developing a consensus over how to
improve fiscal balances, particularly provincial spending. |
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Economic freefall at end of
last year
Even before default and devaluation the Argentine economy was in a dire
state. On 22 March, the Ministry of Economy reported that Gross Domestic
Product (GDP) contracted a whopping 10.7% in the fourth quarter last
year over the same period in 2000, which was down from the 4.9% drop
observed in the third quarter. The data show that investment led the
decline with a 29.4% annual drop in the fourth quarter (-17.2%
year-on-year in the third quarter), while consumption declined 11.4% for
the same period (-5.9% yoy in Q3). The slumping demand prompted a 33.8%
decline in imports, while export growth registered a mere 0.1%
expansion.
Virtually all sectors with the exception of fishing (+92.9% yoy) and
mining and quarrying (+4.9% yoy) experienced a decline in activity. The
construction industry led the contraction with a 24.8% drop over the
same quarter in 2000, followed by financial services (-20.6% yoy),
wholesale and retail trade (-17.8% yoy) and manufacturing (-15.8% yoy).
The dismal fourth quarter showing brought down the economic decline last
year to 4.5%, which was the worst recession observed since 1989.
Industry recession amidst financial controls
and volatile economic situation
The political and economic disarray of recent months has exacerbated the
backdrop for the economy. In fact, the decline in economic activity is
likely to have accelerated even further in the first quarter. According
to the National Statistical Institute (INDEC), industrial production
plummeted by 15.0% in February over the same month last year, only
slightly up from the 18.5% contraction in January. The strongest
contractions were observed in machinery, textile and vehicle output,
which dropped 52.6%, 52.1% and 48.1% respectively over the same month in
2000. Business sentiment also remains very subdued but is up from the
depressed level observed in February. The INDEC industry survey shows
that 34.8% of the businesses polled anticipated a further drop in
internal demand in March (51.9% in February), while 54.3% expected no
change (44.2% in February) and just 10.9% expected improvement (3.9% in
February). Even though the figures represented an improvement over the
previous month, sentiment remains very downcast.
Consumption remains down as Argentines remain
cash strapped
Supermarket sales dropped 2.7% in February, which was an improvement
from the 7.6% and 15.3% declines observed in January and December
respectively. However, the improvement is likely to be a less fortuitous
reflection of the current economic disarray, whereby consumers are
rushing to purchase goods in fears of further price spikes. Despite the
moderate improvement, high unemployment, financial controls and tight
credit conditions are likely to hold any meaningful consumption recovery
at bay for the time being.
Growth prospects revised downward further as
government muddles through
Consensus panellists have again lowered their forecasts for growth this
year, as the inability of the government to make firm commitments to
demands from the International Monetary Fund (IMF) is keeping
international aid at bay. The resulting deterioration in economic
conditions threatens to throw the economy into further recession.
Participants now expect economic activity to decline at a
staggering rate this year, which is down
yet again from last month and almost twice the
recession level expected just three months ago. Both consumption and
investment are anticipated to remain in deep recession. The external
sector will constitute the only positive growth element but even despite
the hefty devaluation, exports are seen as expanding at
a dismal rate. Most
economists do not anticipate the economy to enter positive territory
until the second quarter of next year. A strong export expansion and
rebounding investment will provide the backdrop for the recovery in
2003, when the economy will grow - the first year of positive growth
since 1998.
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