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The
economy is proceeding along a robust expansion path, as domestic demand
benefits from lower interest rates, improved credit conditions and a
stronger exchange rate. Even though Central Bank intervention in
currency markets is not curtailing the appreciation of the exchange
rate, the strong global demand and high commodity prices are likely to
fuel growth in the external sector further. Meanwhile, the energy
shortages are likely to keep the current expansion below potential. |
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Growth
outlook favourable but uncertainty over impact of energy shortfall
overshadowing
In
February, the monthly indicator for economic activity (IMAE, Estimador
Mensual de Actividad Económica) increased 10.5% over the same month
last year – well ahead of the 9.0% growth rate observed in the
previous month. The February figure confirmed that economic growth
remains robust. However, in seasonally adjusted terms, economic
activity was unchanged over the preceding month compared to a 1.33%
monthly increase in January.
Industrial
production accelerates in March
Nevertheless,
more recent data confirm that the economy remained on solid footing
throughout the first quarter of the year. In March, industrial
production expanded 15.5% over the same month last year. The March
figure was well above the robust 13.4% year-on-year growth number for
February and confirmed the acceleration trend observed since the
beginning of the year. Growth remained strong across all
sub-sectors of industry with motor vehicle output (+62.7% yoy) and
printing/publishing (+40.5% yoy) production leading the way. The
lowest growth rates were observed in textile production and oil
processing, where activity rose a more modest 3.5% and 5.7% respectively
over the same month last year.
Consumption
gaining speed but confidence in recovery waning
Similarly,
the strong expansion in private consumption is enduring. According
to the National Statistical Institute (INDEC), real supermarket sales
rose 14.9% in February over the same month last year. The February
figure was the strongest growth rate observed since INDEC began tracking
supermarket sales in 1996 and was well above the prior month’s 9.1%
expansion. However, consumer confidence has been dented by the
current energy shortages. In April, the University Torcuato di
Tella's (UTDT)
consumer confidence index (ICC) for Buenos Aires dropped 5.6 percentage
points over the previous month. Of the surveyed participants,
47.0% anticipate that the economic situation will improve in the short
and medium term, which was down notably from 55.7% in March and
represented the lowest level observed since May last year.
Nevertheless, the favourable effect of the strengthening exchange rate
on real incomes, declining unemployment and increased credit
availability will continue to provide a more favourable backdrop for the
current recovery in private consumption.
Energy
shortages to curtail activity but strong growth to persist
The
current strong economic expansion could be threatened by energy
shortages. In the aftermath of the devaluation and debt default in
2002, the government had frozen public utility tariffs to avert further
erosion of real incomes. As a result, utility companies cut back
on new investments, which effectively froze the capacity of electric
energy. In combination with robust economic growth, the stalled
investments have prompted energy shortages. The government has not
yet announced a medium-term strategy to address the energy shortfall but
has adopted numerous short-term measures to avert a full blown crisis.
In March, electricity voltage in the national grid was cut to avert
power outages for residential users and authorities decreed a drastic
cutback in natural gas and electricity exports to some neighbouring
countries, while simultaneously raising energy imports from other
countries in the region. The government’s efforts to avoid
full-scale energy rationing via voluntary energy consumption cuts by
residential and commercial users is likely to give way to a more
structured programme. In fact, on 2 May, the government announced
measures with explicit economic sanctions if energy users do not
diminish consumption. The plan outlines explicit payment of
penalties for residential and industrial users alike. If energy
consumption exceeds 95% of the prior year’s level, then users will
have to pay up to 50% more per kilowatt hour of electricity used and up
to 40% more per cubic meter for natural gas consumed. Current
estimates place the cost of the energy consumption cutbacks in terms of
economic activity at 1-2 percentage point less in GDP growth this year
but even so the economic expansion is likely to remain robust.
Outlook
improves despite energy shortage concerns
Optimism
about the persistence of the current economic rebound rather than
concerns about an energy crisis-induced slowdown continues to drive
Consensus Forecast participants’ assessment of growth prospects for
this year. Participants expect economic activity to have expanded
8.8% in the first quarter but to begin slowing by the second to a 7.3%
pace. Furthermore, growth is expected to moderate further in the
second half of the year, which will drag down the annual growth rate to
6.8% for this year. Even so, the Consensus figure for GDP growth
for the full year has been lifted again – 0.3 percentage points over
last month. The Consensus outlook is on the lower end of the
Central Bank’s revised growth estimate of 21 April for 2004, which
sees the gross domestic product (GDP) expanding 8% instead of the
previous 6% but still remains ahead of the government’s more
conservative 5.5% estimate. This month’s upward adjustment
represents the eighth consecutive improvement in the growth outlook for
this year. However, the pace of economic activity is likely to
moderate further next year, with GDP seen to expand at a lesser 3.8%,
which is down 0.1 percentage point from last month’s forecast.
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