July data reiterate Argentina's choppy recover
Industrial production (IP) fell by 2.6% in seasonally adjusted, month-on-month terms, marking the fifth sequential contraction in the first seven months of the year. Although IP is above pre-pandemic levels, the result should be viewed in the context of a protracted manufacturing recession. As such, IP is still about 8% below its end-2017 peak.
Disaggregated data are only available in non-seasonally adjusted terms, which complicates the analysis of the figures. However, an accompanying report published by the Ministry of Productive Development indicates that about half of the 16 manufacturing segments fell back in sequential terms in July. The performance of the automotive sector was especially poor, as a global shortage of semi-conductors and microchips constrained car production. The other main driver of the monthly IP contraction was agro-industry; lower crop yields hampered oilseed crushing, and continued restrictions on meat exports—unsurprisingly—prompted livestock producers to cut back output. More broadly, the data highlight the vulnerability of the ongoing IP recovery to supply-chain disruptions, policy missteps and idiosyncratic shocks.
Construction activity performed better, rising by 2% in seasonally adjusted, month-on-month terms in July. At its current level, construction output is similarly above pre-pandemic levels, but 8% below its end-2017 peak. We believe that the near-term outlook for the construction sector is fairly positive, as shown by the strong issuance of new building permits. The area covered by new permits reached 4.5m sq metres in January-June— the highest total for this period since records began in 2016.
The improvement is being led by public investment, which has risen sharply in real terms, following huge cutbacks in 2016-19 under the previous government and weak budget execution in 2020, owing to pandemicrelated constraints. Although private works were less dynamic, they have nonetheless benefited from tax incentives provided by the government, and the low cost of construction inputs (in US dollar terms).
We expect a more generalised improvement in economic activity in the remainder of 2021, as the Covid-19 vaccine rollout gathers pace and allows for further easing of mobility restrictions. However, economic momentum is likely to lose steam again in early 2022, assuming that the government tightens fiscal and monetary policy under a new IMF-backed structural adjustment programme.
Impact on the forecast
Our real GDP growth forecasts for 2021-22 are unchanged, but downside risks persist.