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Recession deepened in Argentina

January 28, 2019

We forecast a GDP decline of 2.2% for the full year of 2018 due to tight macro policies and lower real wages

Talk of the day


Economic activity in Argentina plunged in November, contracting more than expected by the market. The EMAE (the official monthly GDP proxy) fell by 7.5% yoy, worse than market expectations (6.0% drop) but in line with our forecast (7.4% drop). On a sequential basis, economic activity fell by 2.3% mom after growing by 0.6% (this figure was revised upward) in October. The EMAE consequently fell by 5.9% yoy and 6.7% qoq (annualized) in the quarter ending in November (following declines of 3.5% and 2.6%, respectively, in 3Q18), and fell by 2.2% yoy in the first 11 months of 2018.

We forecast a GDP decline of 2.2% for the full year of 2018 due to tight macro policies and lower real wages. We forecast zero growth in 2019, but the risks are tilted to the downside. While higher net exports – due to a weaker currency, the normalization of agricultural output and the recovery in Brazil – will support activity this year, internal demand is likely to remain weak due to ongoing necessary fiscal and monetary adjustments. Finally, uncertainty regarding the outcome of the presidential elections poses another downward risk to growth.


Lower VAT in the northern frontier and lower energy prices exerted downward pressure on the CPI. Mexico’s CPI posted a bi-weekly rate of 0.11% in the first half of January (from 0.24% a year ago), below our forecast (0.18%) and median market expectations (0.25%). The figure reflects the effect of a lower VAT in the northern frontier. In fact, the CPI aggregate of the northern frontier posted a bi-weekly decrease of 1.02% (compared to the 5yr median of a positive 0.54%). Moreover, energy prices decreased 1.18% (compared to +1.68% a year ago), while non-core agro products increased 1.28% (compared to -1.00% a year ago).

We expect inflation to reach 3.8% for the end of this year. The most recent figure reflect the effect of the lower VAT in the northern frontier, which is one-off. Looking forward, lower oil prices should exert less pressure on the non-core component. However, upside risks to inflation remain due to remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and the uncertainty over domestic policy direction.
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Economic activity was above market expectations, but slowed down on an annual basis, dragged by the industrial sector. Mexico’s monthly GDP proxy (IGAE) expanded 1.8% yoy in November (from 2.9% in October), above our forecast (1.1%) and median market expectations (1.2%). According to calendar adjusted figures, IGAE grew 1.7% yoy in November, slowing down from 1.9% in October, taking the three-month moving average (3mma) growth rate to 2.2% yoy (from 2.3% in October). Looking at the breakdown, also using 3mma calendar adjusted figures, primary sector (1.7% yoy in the quarter ending in November, from 0.2% October) accelerated, while services sector continue to grow at a decent pace (3.1%, from 3.0%). In contrast, mining (-3.8%, from -2.4%) and construction (-0.8%, from -0.5%) output kept contracting, while manufacturing sector decelerated to 2.1% (from 2.2%).  Excluding sectors driven by supply conditions (agricultural and mining), calendar-adjusted GDP grew to 2.5% in the quarter ending in November (from 2.4% in October). 

We expect economic activity to slow to 1.7% this year, from an expected 2.0% in 2018. Uncertainty over the new administration’s policy direction and remaining uncertainties over the approval of NAFTA by the U.S. Congress will continue to weight on investment. Deceleration in the U.S. economy will also curb growth.
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Day ahead: INEGI will announce December’s trade balance at 12:00 PM (SP Time). We expect manufacturing exports decelerated, in line with the recent weakness in the US ISM manufacturing PMI index for December


Tax collection came at BRL 141.5 billion in December, weaker than our call (BRL 145 bln) and the market’s (144.2 bln). Tax collection decreased 1.0% yoy in real terms in the month, but this was distorted by large REFIS/PRT revenues collected in December last year. The negative highlight in the month came from revenues related to consumption which declined 2.5% yoy in real terms in the month, while revenues related to the wage bill had a small recovery (0,7% yoy in real terms).

Excluding revenues from the REFIS/PRT, tax collection keeps a good pace, despite some weakening at the margin. Real revenues ex-REFIS increased 0.9% yoy in real terms in the month, with the 3-mma going to 4.2% from 5.2% in November.  In 2018, tax collection increased 5,6% in real terms, the fastest pace since 2011 and better than economic activity, following increases in revenues related to companies’ profits and oil royalties. We expect tax collection to continue outpacing GDP in 2019.

Day ahead: Current account balance relative to December will be released at 10:30 AM (SP Time) for which we forecast a $1.0 billion surplus. Also, Direct investment in the country will likely amount to USD 9.5 billion, leading the 12-month reading to USD 87 billion (4.5% of GDP).

The Week Ahead in LatAm


The Senate and the Lower House will return from the legislative recess on Friday, with the speakership elections scheduled to take place on the same day.

On economic activity, December’s industrial production will be released on Friday. We forecast a slight 0.1% mom/sa increase, which translates into a 3.7% contraction in year-over-year terms. Also, December’s PNAD national unemployment rate will come out on Thursday, for which we forecast a 0.2 p.p. decrease to 11.4% (stable on seasonally adjusted terms). Finally, FGV’s business confidence surveys for January on construction, industry (the preview was released last week) and services, as well as the economic uncertainty indicator, also for January, will be released throughout the week.

On external accounts, we expect the current account (to be released today) to post a $1.0 billion surplus in December 2018, above the USD 1.9 billion deficit seen in the same month of 2017. Over 12 months, we expect the current account deficit to recede to USD 11.1 billion (0.6% of the GDP). Direct investment in the country will likely amount to USD 9.5 billion in December, leading the 12-month reading to USD 87 billion (4.5% of GDP). Trade balance’s result for January will also be released (Fri.), for which we forecast a USD 2.7 bn surplus, below the USD 2.8 bn surplus posted in the same month of last year. In month-over-month terms, exports are set to decrease 2.7% and imports are set to rise 2.6%. Over 12 months, we expect the trade balance to remain at USD 58 bn.

Finally, on fiscal accounts relative to December, we expect the central government (Wed.) to post a BRL 36.1 bn primary deficit, and the consolidated public sector (Thu.) to post a BRL 42.1 bn primary deficit. These results are consistent with the primary deficit ending 2018 at BRL 109 bn (1.6% of GDP).


On Wednesday, the central bank will announce its first monetary policy rate decision of the year. Following the first rate hike of the cycle in October, the board unanimously decided in December to hold the policy rate at 2.75%, consistent with the repeated message of a gradual withdrawal of the monetary stimulus. With activity surprising and confirming the output gap narrowing continued at the close of 2018, the board will likely feel comfortable with delivering another interest rate increase. Hence we expect a 25bp hike to 3.0%. Supporting the decision would be the board’s view that the output gap is near closed, its upbeat mood about the labor market, and inflation indicators sensitive to domestic demand gradually rising.

On Thursday, the national institute of statistics (INE) releases industrial activity indicators for December. Manufacturing activity dragged down industrial production in November. However, mining activity, which had been a drag for the previous four months, bounced back as the base of comparison normalized and ore-grade improved. Still low business confidence and an annual decline in electricity generation point to a weak print in December. We expect manufacturing production to increase 1.5% yoy (-4.7% previously), aided by a particularly low base of comparison.

On the same day, INE releases the national unemployment rate for 4Q18. The unemployment rate in the quarter ending in November was 6.8% (0.3pp higher than one year earlier) as the 0.9% labor force growth more than offset employment growth of 0.5%, while falling participation contained the tick-up in the unemployment rate. However, salaried job creation continued to lead employment growth. We expect the unemployment rate to come in at 6.7%, above the 6.4% recorded one year before and result in an average unemployment rate of 7% in 2018 (6.7% in 2017).


On Thursday, the institute of statistics will release the unemployment rate for December. The labor market was weak in November with the national unemployment rate rising to 8.8% (8.4% one year earlier), with urban unemployment rising 0.2pp to 9.8%. In the quarter ending in November, the national unemployment rate picked up 0.4pp to 9.1%, while the urban unemployment came in at 10.2% (+0.3pp). A falling participation rate in urban areas is also limiting the increase in the unemployment rate, while job growth is of low quality. We expect the urban unemployment rate in December to come in at 10.6% (9.8% one year before), leading to 10.2% unemployment in 4Q18 (9.6% one year before).

Also on Thursday, the central bank will hold its first monetary policy meeting of 2019. We expect no change of status-quo, with stable rates (4.25%) remaining likely for still some time. The dilution of the financing law reduces the inflation risks for this year, inflation expectations are anchored, the activity recovery fragile and the external environment risky meaning the board is unlikely to reduce the mild stimulus just yet.


Starting the week, INEGI will announce December’s trade balance. We expect manufacturing exports decelerated, in line with the recent weakness in the US ISM manufacturing PMI index for December. Likewise, we expect the energy balance deteriorated further in December, reflecting the fall in oil output.

In the middle of the week, the statistics institute (INEGI) will publish the flash estimate of Q4’s GDP growth which we estimate at 1.9% year-over-year (down from 2.5% in 3Q18), taking 2018 annual growth to 2.0%.

On the same day, the Ministry of Finance (MoF) will publish the reports on economic activity, public finance and public debt as of 4Q18. We expect fiscal balance indicators reached MoF estimates of 0.7% and -2.0% of GDP for the primary balance and nominal balance for 2018, respectively, reflecting the final year of fiscal consolidation of the previous administration (Enrique Peña). We expect lower oil prices, registered during the 4Q18 deteriorated oil revenues (although the effect was partially offset by the depreciation of the exchange rate). However, we expect to see a retrenchment on the expenditure side as several programs and hiring were suspended due to the government transition period.


The statistics institute (INEI) will announce January’s CPI inflation on Friday, which we forecast at 0.22% month-over-month. We expect a recovery in domestic demand to push prices up. Assuming our forecast is correct, annual headline inflation would post 2.30% year-over-year in January (from 2.19% in December).

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