Economy underperforms expectations in first quarter

ARGENTINA - Report 29 Apr 2016 by Domingo Cavallo

In the first quarter, the Argentine economy deviated from our expectations in three areas: inflation, growth, and foreign trade.
Even though the market exchange rate is still within the range we had predicted, examining the functioning of the free floating foreign exchange market after the elimination of exchange restrictions during the last four months convinced us that when the foreign exchange stabilizes, it will do so closer to 16 rather than to 15 pesos per dollar.
Inflation was higher than expected. It almost doubled in monthly terms in comparison with the inflation in the fourth quarter of 2015. We had anticipated a one-time impact from the unavoidable adjustment of public utility rates; however, the pass through of the currency devaluation was higher than expect.
Inflation will go down in the second quarter, but the decline will be slow because there will be some impact of the nominal wage increases that are currently being negotiated between trade unions and employers. The impact of very restrictive monetary policy will probably show up in the third quarter. If the nominal exchange rate stabilizes around 16 pesos per dollar, inflation rate may fall close to 1% per month by the end of 2016. All in all, we have revised up our inflation forecast for the year to 33 % as compared to 25 % forecasted in January.
We had forecasted a recession in the first semester and a strong recovery in the second semester led by exports and investment. But recession was deeper than expected in the first quarter and may well worsen in the second quarter, particularly because the higher than expected inflation and the aggravation of the crisis in Brazil. Therefore, we expect now that there will be no growth in 2016 down from the 1 % forecast in January.
Exports and imports have increased in the first quarter, but also below expectation. Public investment has been in negative territory, but it may start to expand in the second semester. Private investment is hard to predict because the improved expectation in external financial markets has not shown yet to have revived significant real investment appetite.
We have not revised our 2017 forecast except for the impact in nominal variables of the change in the nominal exchange rate and in inflation during 2016. In the quarterly report due in July 2016 we will revise also the 2017 figures. By then, we expect to have new figures for almost every economic variable produced by the new INDEC. For the time being, there is an almost complete blackout as official national accounts are concerned, and it does not make sense to make one year ahead forecasts based on unreliable data.

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