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Economic activity dips again in September

Economic activity dips again in September

According to INDEC, the national statistics institute, the Estimador Mensual de Actividad Económica (EMAE, the monthly economic activity index) contracted by 0.8%in August in seasonally adjusted, month-on-month terms. Theyear-on-year decline in output was2.1%.

Analysis

The INDEC produces disaggregated data by sector in non-seasonally adjusted terms only, which complicates the analysis. Nonetheless, it is evident that a decline in non-primary activity has taken hold. Manufacturing activity fell by 5%year on year, markingthe 17thconsecutive month of contraction for the sector. This owes in large part to the recession faced by the domestic automotive sector. Production of vehicles fell by 25%in September, while that of autoparts fell by13%

The decline of the automotive sector has its roots in a collapse of domestic purchasing power (amid sharp currency adjustments) and the unavailability of credit, both of which have squeezed demand for big-ticket items. These factors also contributed to the weakness of the wholesale and retail trade sector, which contracted by 5.2%in September.

Interestingly, banks have maintained profit margins in this high-interest rate environment, owing to wide lending-deposit spreads. According to the Banco Central de la República Argentina (BCRA, the central bank) the financial system saw a return on assets of 7.9%in September, while return on equity was 65.8%. However, given that the sheer volume of transactions has fallen dramatically, the financial sector posted a sharp decline of 14.6%. Atend-September credit to the private sector stood at just 11.3%of GDP (compared with the Latin American average of around 54%of GDP).

Although looser monetary policyin the coming months could lift credit demand somewhat, any improvement is likely to be modest in a context of high uncertainty. Business lending in particular is unlikely to pick up significantly in the short term; firms will wait to assess the credibility of the economic plan proposed by the president-elect, Alberto Fernández, before making major investment decisions. Although we assume that Mr Fernández will pursue relatively orthodox economic policy, risks to this assumption are substantial.

Impact on the forecast

The data were broadly in line with our estimate for a 3.3% GDP contraction in 2019. Alarge statistical drag will mean that—even accounting for sequential recovery by mid-2020—we continue to expect a full-year GDP decline of 2.3%in2020.

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