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July 27, 2021

The Week at a Glance

Argentina: The Economy Dancing the election music

BY Alejandro Giacoia, Andrés Borenstein, Miguel A. Kiguel, Lorena Giorgio, Isaías Marini

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( 4 mins)

On the weekend the first stage of the primaries closed and therefore the candidates for the legislative elections in November are already outlined. The economy began to rebound in June and the data looks very different from the first half. In the absence of a “delta invasion”, the level of activity could close the year between 2.5 and 3 points higher than the May level announced last Thursday, that is to say an interesting reactivation, although without much job creation. The economy will grow at least 7% this year. Inflation will remain high to close slightly below 50%, but the average for the second semester will be around 3% compared to 3.8% for the first semester, so there is an improvement there as well.

Is the Fiscal Adjustment Sustainable?

The “shortcut” that the government used to cut the pensions expenditures, together with the extraordinary revenues (solidarity contribution and export duties), allowed it to achieve a remarkable fiscal adjustment in the first semester. Nevertheless, this will change in the second part of the year, first because both effects were transitory and second because of the expenditures pressures that will come from the electoral needs. If we do an analysis item by item, there are some government expenditures that were effectively reduced but only for this year, pensions are the most remarkable example. In addition, many other ones are beginning to have an increasingly dizzying dynamic, such as social programs and subsidies. This suggests that, although the primary deficit in the first half of the year was the lowest in 8 years -in 2019 there was a primary surplus-, for the period that will be known as the post-pandemic era it will be necessary to think about how to finance a primary expenditure that, without the extraordinary revenues, today it would be unmanageable.

Activity: After the Storm, the Sun Rises

May was a very bad month for economic activity, as we had already announced. Activity fell 2.0% without seasonality, although we expected the drop to be somewhat greater, around 3%. In year-on-year terms, activity grew by 13.6%, below the 14.9% of our nowcast and the 16.2% of the market consensus. If the previous seasonal factors were maintained, this year-on-year variation would have implied a much greater monthly decline. In fact, the past months were strongly revised: the fall in February was reduced, March went from negative to positive (as we anticipated a few months ago), and the decline of 1.2% in April was reduced to just 0.3%. We expect further revisions in the coming months. But the data that came out for June and some very preliminary data for July indicate that the storm has passed and, although we do not expect a boom, activity will gain ground in the coming months.

All That Glitters Is Not Gold

The trade surplus for the first half of the year reached US $ 6.74 billion and we expect that in all of 2021 that number will approach US $ 13 billion, the highest in two decades. But those numbers are not as good as they appear on the surface. In the first place, the price effect is largely responsible for this level. According to INDEC’s own accounts, if prices were the same as last year, the surplus would have been testimonial: only US $ 2.5 billion. The second reason is that while no one has precise numbers, one would think that there are at least $ 3 billion of blocked imports. A very conservative number considering the shortages of numerous products, from auto parts and other products to tennis shoes and balls. At this point last year, the trade surplus was US $ 8.31 billion, although the magnitude of the recession at that time makes the comparison not very useful.

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