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Activity is weakening, in line with tight monetary policy, low confidence, and high inflation. Core retail sales fell sequentially in March, while manufacturing increased slightly from February after six consecutive sequential declines. Retail sales contracted 7.1% YoY in March (down from -0.01% in February), sharper than both the Bloomberg market consensus and our call of a 3.0% drop. Core retail sales (excluding fuels and vehicles) fell 7.6% YoY (0.5% in February), falling 0.7% from February (SA; -0.8% previously). Meanwhile, manufacturing expanded by 0.4% MoM/SA, leading to a 2.0% YoY decline (+0.3% previously), falling between the Bloomberg consensus (-0.8%) and our call (-6.0%). During 1Q23, both manufacturing and retail sales contracted, the first fall since the post-pandemic recovery. The evident activity slowdown, the peaking of inflation in April and falling inflation expectations are consistent with our view that the central bank hiking cycle likely concluded at 13.25%.


Manufacturing fell in 1Q23, the first drop since 4Q20. During the first quarter of the year, manufacturing fell 0.5% YoY, down from the 3.4% increase in 4Q22. At the margin, manufacturing contracted 8.7% qoq/saar, building on the 4.7% contraction in 4Q22 (+3.5% in 3Q22). Manufacturing levels are now 13.5% above pre-pandemic levels, retreating from the near 18% peak during 3Q22.


Retail sales remained weak. In the 1Q23, retail sales contracted 2.2% YoY, from +0.5% in 4Q22, while core retail sales decreased 1.7% (0.7% contraction in 4Q22; +6.4% in 3Q22), with electronics being a key drag. At the margin, core retail sales were stable from 4Q22 to 1Q23, unable to rebound from near double-digit falls in the prior two quarters. Core retail sales sit 13% above pre-pandemic levels (+24% by mid-2022).  


We expect GDP growth of 0.6% this year, down from 7.5% in 2022. The coincident activity indicator and the national accounts data will be published on Monday. The sectorial data is consistent with a 1.0% YoY increase in March (3.0% in the previous month) and 3.3% increase in 1Q23, as the services adjustment unfolds more gradually. High rates, weak sentiment and elevated policy uncertainty will contribute to the activity slowdown this year. 

Vittorio Peretti 

Carolina Monzón