Argentina: Small Recover Delays the Recession Threat for Now
Recent activity data for Argentina suggests that the economy has exhibited a partial recovery following the 1.5% decline experienced in the previous quarter of 2022, indicating positive growth during Q1. However, it is important to acknowledge the potential challenges that lie ahead for Argentina's economy. The ongoing droughts in rural areas are expected to limit export capabilities, and the persistently high inflation rates are likely to contribute to a projected 2% contraction in the economy for 2023.
Figure 1: Argentina Activity Index (2019 = 100, Seasonally Adjusted)
Source: INDEC
The Argentine National Statistics Institute (INDEC) has released the estimation of its monthly activity indicator. The released data suggest that the Argentine economy has recovered during the first months of the year. Therefore, it is very likely that the GDP estimations for the first quarter of 2023 will show positive growth, around 0.7% (q/q), recovering partially from the 1.5% drop in the last quarter of 2022.
A significant part of this growth can be attributed to the mining activities associated with the upcoming operationalization of the “Vaca Muerta” pipeline. These activities have had a notable impact on the industrial activity, particularly construction and mining which have been expanding in recent months. However, we see services to continue to be stagnant as the pent up demand effects from the reopening seems to have been vanished. The agricultural sector is expected to have contracted as the effect of the droughts are starting to be felt.
Despite the growth in the first quarter, there are concerns that the Argentine economy may face challenging times ahead. The severe droughts in rural areas are expected to significantly diminish the country's main source of grain exports, resulting in fewer dollars for the depleted BCAR reserves. Moreover, inflation has already surpassed triple digits and shows no signs of improvement in the short term.
To exacerbate matters, access to scarce dollars in the Argentine economy is expected to dwindle further as new import restrictions are imposed. This will disrupt important supply chains and reduce the country's production capacity. Additionally, high inflation will continue to erode the purchasing power of salaries, while the government's inability to issue new bonds to finance its deficit will necessitate increased monetary financing. Even rising interest rates are unlikely to have a significant impact.
All these factors combined indicate that Argentina is headed towards a recession in 2023, with the second half of the year likely to see a more pronounced contraction. We believe that Argentina's economy will shrink by approximately 2% in 2023.