Argentina’s GDP fell in 2Q18, interrupting five consecutive quarters of expansion. GDP fell 4.2% YoY in 2Q18, after growing 3.9% in 1Q18 (revised up from 3.6%). Growth was consistent with market expectations (according to the Bloomberg survey) and with the official monthly GDP proxy (EMAE), which also showed a 4.2% drop in the quarter. On a sequential basis, output decreased by 4.0% quarter over quarter, following a 0.7% gain in 1Q18. As a result, the cumulative rolling-four-quarter GDP growth came in at 1.6% YoY, down from 3.6% YoY in 1Q18.
Domestic demand posted a marked deceleration following a slowdown in investment and weaker consumption. Domestic demand (excluding inventories) grew a modest 0.5% YoY (-2.1% adjusted for seasonality). Gross investment rose by 3.1% yoy, marking a significant deceleration from the previous three quarters (16% average expansion). Private consumption increased by 0.3% in 2Q18 (down from 4.3% in 1Q18), while public consumption contracted by 2.1% (from -1.2% in the previous quarter) due to a reduction in federal primary expenditures. Imports rose by 2.7% yoy, while exports fell by 7.5% yoy, affected by a poor harvest. On a sequential basis, fixed investment fell by 6.9%, private consumption retreated by 1.1% and public consumption remained flat. Imports and exports fell by 5.4% and 14.2%, respectively.
Across sectors, agriculture posted the worst performance. Agricultural output plummeted by 31.6% yoy in 2Q18, following a severe drought – the steepest decline since 2009. Most of the other sectors also showed a deceleration. Construction increased by 5.5% yoy, down from 10.7% in 1Q18. Manufacturing and Commercial activities declined by 1.8% and 1.6% respectively, after posting 3.7% and 6% growth in the previous quarter. On the other hand, financial intermediation rose by 8.7% (up from 5.8% previously), while electricity, gas and water expanded by 2.0% yoy (-0.1% in 1Q18).
The economy is expected to continue to weaken in the coming quarters. The government is negotiating a new credit line with the IMF and has intensified the adjustments necessary to cope with a new round of deteriorating asset prices and challenges in accessing capital markets. The tighter macro policies (faster fiscal consolidation and higher interest rates) will hinder domestic demand. A weaker currency and higher inflation will likely lead to a decline in real wages and private consumption. We forecast a GDP contraction of 2.2% for 2018.