Itaú BBA - Evening Edition - Argentina’s GDP data confirm recession

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Evening Edition - Argentina’s GDP data confirm recession

December 19, 2018

We forecast a GDP contraction of 2.2% this year

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Argentina’s GDP fell in 3Q18, the second consecutive drop. GDP fell 3.5% yoy in 3Q18, after falling 4.0% in 2Q18 (revised up from -4.2%). Growth was consistent with market expectations and with the official monthly GDP proxy (EMAE), which also showed a 3.5% drop in the quarter. On a sequential basis, output decreased by 0.7% qoq, following a 4.1% decline in 2Q18 (due to the severe drought that affected the economy in the period).

Domestic demand plummeted, led by a marked reduction in investment and consumption. Domestic demand (excluding inventories) fell 5.9% yoy (-4.5% qoq adjusted for seasonality). Gross fixed investment fell by 11.2% yoy, posting the first drop since 4Q16. Private consumption retreated 4.5% in 3Q18 (also marking the first drop after six consecutive gains), while public consumption contracted by 5.0%, reflecting a reduction in federal primary expenditures. Imports plummeted by 10.2% yoy, affected by the sharp depreciation of the ARS, while exports fell 5.9% yoy, affected by a poor harvest. On a sequential basis, fixed investment declined by 8.1%, private consumption retreated by 4.0% and public consumption dropped 1.5%. External demand had a positive contribution in the period, with imports down 7.5% and exports up 4.1%.

Most sectors registered declines in 3Q18. Commercial activities and manufacturing declined by 8.9% yoy and 6.6% yoy, respectively, after declining by 1.3% and 1.7% in the previous quarter. Agricultural output fell 5.2% yoy in 3Q18, after a sharp contraction of 31.3% in the previous quarter. Most of the other sectors also showed a contraction. Transport and communication fell 3.8% yoy and construction decreased by 0.8% yoy (after six consecutive gains). On the other hand, financial intermediation gained 5.1% (down from 8.8% previously), while electricity, gas and water expanded by 1.4% yoy (from 2.3% in 2Q18). 

We forecast a GDP contraction of 2.2% this year. While we expect external demand and the normalization of agricultural output to help activity in 2019, we note that internal demand will remain weak and limit the recovery due to still-tight macro policies in a year of political uncertainty. We forecast zero growth next year.
** Full story

Unemployment rate increased to 9.0% in 3Q18 from 8.3% in 3Q17, according to the INDEC (the official statistical agency). The figure was lower than market expectations (9.8%). The employment rate rose to 42.5% from 42.4% in the same quarter one year ago, while the participation rate increased to 46.7% in 3Q18 from 46.3% in 3Q17. Across regions, the highest unemployment rate was registered in the greater Buenos Aires (10.5%), which explains 56% of the work force.  We expect the labor market to show a deterioration this year, in line with the contraction in economic activity. We expect the unemployment rate to rose to an average of 9% this year, from 8.3% in 2017.

Trade surplus came in better than expected in November. The trade balance posted a surplus of USD 979 million, markedly above our expectations and those of the market (surplus of USD 150 million and USD 191 million, respectively). Consequently, the 12-month trade deficit decreased to USD 6.0 billion, from USD 8.5 billion in October. Adjusted for seasonality, the reversal of the trade balance is striking, as the three-month result was USD 5.7 billion surplus (annualized), up from a USD 1.9 billion deficit in the quarter ending October. Total exports increased 14.5% yoy in November, driven by primary products (30.6% yoy). On the other hand, imports, excluding energy, fell by 24.3% yoy in the quarter ending in November, while total imports fell 22.8% in the same period. We expect the current account deficit at 1.2% of GDP next year, from an estimated 4.4% of GDP, due to a weak currency and poor evolution of internal demand, amid normalization of agricultural output.  ** Full story here.

Tomorrow’s agenda: The treasury ministry will publish the federal fiscal accounts for November. According to our estimations, the 12-month rolling primary deficit posted in October was slightly below the 2.7% target for the year. The Congress recently passed a budget for 2019 that targets a zero primary deficit, consistent with the target agreed with the IMF


The minutes of the unanimous decision to keep the policy rate at 2.75% in December show the board has no doubt that the normalization process needs to proceed. Given that the flagship Inflation Report was published the day following the decision, updating the baseline scenario, the minutes do not surprise. Overall, the board sees the output gap narrowing, while inflation measures sensitive to this evolvement have been rising through the year (services and non-tradables). Hence, it is viewed less necessary to retain the level of monetary stimulus in place. The board emphasized its message of a gradual (predictable) and cautious (opportunity to analyze changes in the macroeconomic scenario that could justify a trajectory adjustment) normalization process. 

Overall, the board reaffirmed the normalization process would continue in the coming months. Despite growing signaling for a hike in January (30th), we believe it is not a done deal, considering that inflation is likely to dip further (and downside risks are growing). Meanwhile, the activity recovery is yet to consolidate and risks are rising from waning private sentiment and slower global growth.
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Macro scenario: Activity confirmed a moderation in 3Q18, failing to expand for the second consecutive quarter, while investment remains subdued and inventories accumulate. We forecast GDP growth of 1.5% this year and 1% in 2019. In 2020, we expect an economic recovery, with growth at 3%, supported by a more benign regional environment.The transfer of assets to the public sector resulting from the “over 50” law reduced the fiscal deficit by 1% of GDP. We now expect a fiscal deficit of 2.9% of GDP for 2018 and 2019, an improvement from -3.9% in our previous scenario. Exchange rate appreciation helped stabilize prices. We maintain our YE18 inflation forecast at 8%. For 2019, our IPCA forecast now stands at 7.5%. We adjusted our YE18 exchange rate to UYU/USD 33.0 (33.5 previously) and maintain our YE19 exchange rate forecast at UYU/USD 36.5.
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Macro scenario: Economic activity showed signs of less dynamism in the last part of the year. In addition to the more-adverse regional context, the construction and livestock sectors showed contractions on the domestic front. We reduced our YE18 GDP growth forecast to 4%, from 4.5% previously. We maintain our YE18 and YE19 inflation forecast at 4%. In this context, we do not expect changes in the monetary-policy rate. The government is on track to beat the fiscal deficit set by the Fiscal Responsibility Law (1.5% of GDP). The Fitch credit agency upgraded its rating of Paraguay’s debt, and it is now one notch below investment grade.
** Full story


Tomorrow’s agenda: The Central Bank’s Quarterly Inflation Report will be released at 8:00 AM. At the same time, FGV’s will release the preview of its confidence survey for December on industry.


Tomorrow’s agenda: The Central Bank of Mexico (Banxico) will hold a board meeting to decide the reference rate. We expect Banxico to hike rates by 25-bps to reach a level of 8.25%. The latest minutes showed two board members seem to have their mind set for a December hike, while a third member is waiting for further news on the incoming administration policies. Moreover, Banxico is expected to take into account an environment of still-high inflation, monetary policy tightening in the U.S. (although the risks of more rate hikes by the Fed than expected seem to have diminished more recently) and uncertainties over the approval in the U.S. congress of the renegotiated NAFTA. In addition, the statistics institute (INEGI) will announce October’s retail sales. We estimate growth of 3.9% yoy, from 4.11% in September.


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