Itaú BBA - ARGENTINA – GDP Plummets in 2Q18 Due to Drought

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ARGENTINA – GDP Plummets in 2Q18 Due to Drought

September 19, 2018

The economy is expected to continue to weaken in the coming quarters

Argentina’s GDP fell in 2Q18, interrupting five consecutive quarters of expansion. GDP fell 4.2% YoY in 2Q18, after growing 3.9% in 1Q18 (revised up from 3.6%). Growth was consistent with market expectations (according to the Bloomberg survey) and with the official monthly GDP proxy (EMAE), which also showed a 4.2% drop in the quarter. On a sequential basis, output decreased by 4.0% quarter over quarter, following a 0.7% gain in 1Q18. As a result, the cumulative rolling-four-quarter GDP growth came in at 1.6% YoY, down from 3.6% YoY in 1Q18. 

Domestic demand posted a marked deceleration following a slowdown in investment and weaker consumption. Domestic demand (excluding inventories) grew a modest 0.5% YoY (-2.1% adjusted for seasonality). Gross investment rose by 3.1% yoy, marking a significant deceleration from the previous three quarters (16% average expansion). Private consumption increased by 0.3% in 2Q18 (down from 4.3% in 1Q18), while public consumption contracted by 2.1% (from -1.2% in the previous quarter) due to a reduction in federal primary expenditures. Imports rose by 2.7% yoy, while exports fell by 7.5% yoy, affected by a poor harvest. On a sequential basis, fixed investment fell by 6.9%, private consumption retreated by 1.1% and public consumption remained flat. Imports and exports fell by 5.4% and 14.2%, respectively.

Across sectors, agriculture posted the worst performance. Agricultural output plummeted by 31.6% yoy in 2Q18, following a severe drought – the steepest decline since 2009. Most of the other sectors also showed a deceleration. Construction increased by 5.5% yoy, down from 10.7% in 1Q18. Manufacturing and Commercial activities declined by 1.8% and 1.6% respectively, after posting 3.7% and 6% growth in the previous quarter. On the other hand, financial intermediation rose by 8.7% (up from 5.8% previously), while electricity, gas and water expanded by 2.0% yoy (-0.1% in 1Q18).

The economy is expected to continue to weaken in the coming quarters. The government is negotiating a new credit line with the IMF and has intensified the adjustments necessary to cope with a new round of deteriorating asset prices and challenges in accessing capital markets. The tighter macro policies (faster fiscal consolidation and higher interest rates) will hinder domestic demand. A weaker currency and higher inflation will likely lead to a decline in real wages and private consumption. We forecast a GDP contraction of 2.2% for 2018. 

Juan Carlos Barboza
Diego Ciongo



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