Argentina's Incredible September

From a market perspective, the Argentina S&P Merval index stands out with the highest ROI globally. As of September 23rd, it has soared 57.4% year-to-date (YTD), outperforming the S&P 500.

Source: Balanz Capital

In light of this, and following our previous report, Understanding the Impact of the Impuesto PAIS Tax Reduction on Argentina's Inflation, several key Argentine economic indicators were released in September by INDEC (the Argentine equivalent of the BLS). These updates are crucial for staying informed on Argentina’s shifting economic dynamics.

The TL;DR is the box below, which shows the performance of key indicators compared to their expected or previous values:

1.- Industrial production

Industrial production measures output from the manufacturing, mining, and utilities sectors. In July 2024, industrial output fell by 5.4% compared to the same month in the previous year, but it increased by 6.9% compared to June 2024. This was a much better result than the -18% decline that had been anticipated, indicating that the sector is faring better than expected!

The manufacturing sector had mixed outcomes, with 13 out of 16 sectors posting annual declines. However, there were notable increases in industries like Food and Beverages (+6.2%), Petroleum Refining (+2.4%), and Other Transportation Equipment (+3.3%).

This performance suggests that industrial activity is stabilizing and production levels are holding up. Such improvements can contribute to job creation and greater economic stability, indicating a potentially positive trend for Argentina’s economy.

2. Capacity Utilization

Capacity utilization shows how much of a country’s industrial capacity is being used. In July 2024, Argentina’s industries were using 59.7% of their total capacity, above the expected 54.5%. This marks the highest level during President Javier Milei's administration! However, despite this rebound, it remained below the 60% threshold and 5.3 percentage points lower than in July 2023.

The negative impacts were seen in sectors like chemicals, metalworking (excluding automotive), and paper and cardboard. However, the automotive industry, which was nearly paralyzed in June, showed a significant recovery, increasing its capacity utilization from 39% to 52.2%.

Higher utilization rates suggest that industries are more productive and efficient, which is great for economic growth as it signals that the economy is maximizing its production capabilities.

3. Balance of Trade

The Balance of Trade measures the difference between a country’s exports and imports. In August 2024, Argentina had a trade surplus of 1,963 million USD, which was far better than the expected 1,410 million USD. This also contrasts with the $974 million deficit from the same month in 2023.

This marked the ninth consecutive month of surpluses! With a 30.7% increase from July. Despite this, total trade volume fell 9.2% year-over-year. Exports increased by 14.9%, largely due to the recovery from the 2023 drought. Meanwhile, imports dropped 29.8%.

A trade surplus can generally be seen as beneficial, as it means the country is exporting more than it is importing, which brings in more foreign currency and supports economic growth. However, the significant drop in imports raises concerns about domestic consumption and investment, Argentina must address the factors hindering import growth to ensure long-term economic stability.

4.- Consumer Price Index

As we reported, INDEC (Argentina's BLS equivalent) reported the YoY CPI print came in at 236.7%, continuing the downward trend also reported by Truflation at 207.46%.

However, the reported MoM CPI of 4.2%, slightly above expectations. Leading the MoM inflation rise were the categories of Housing & Utilities (7.0%), Education (6.6%), and Transportation (5.1%). The largest category, Food and Non-Alcoholic Beverages, remained below the headline MoM CPI at 3.6%.

The reduction in the "Impuesto PAIS" import tax, from 17.5% to 7.5% instated in September, is expected to contribute to a potential easing of inflation in the following CPI reports. Another important indicator that often signals future changes in the CPI, is the PPI, which was next reported by the INDEC.

5.- Producers Price Index

In September, the released data showed a 2.1% increase in wholesale prices, down from 3.1% in the previous month. This is a positive development, as we haven't seen such low PPI numbers since May 2020! The result was largely driven by a decline in international prices for agricultural and energy products, alongside the crawling peg exchange rate policy maintained by the Central Bank since January. This better-than-expected PPI could signal an improvement in future CPI numbers.

However, it's important to remain cautious. The PPI primarily reflects tradable goods and services, making it narrower in scope compared to the CPI, which includes both tradable and non-tradable goods and services.

However, not everything has been positive; some indicators have underperformed compared to expectations:

6. GDP

GDP measures the total value of goods and services produced in a country. In the second quarter of 2024, Argentina’s GDP contracted by 1.7% both quarter-on-quarter (QoQ) and year-on-year (YoY). This contraction was below the expected declines of 0.3% QoQ and 1.4% YoY.

Declines were observed in sectors such as manufacturing (-17.4%), trade (-15.7%), and construction (-22.2%), while agriculture saw significant growth, increasing by 81.2%. Investment plunged 29.4%, consumption fell 9.8%, and public spending dropped 6%. However, exports rose by 31.4%, partly offsetting the domestic slowdown. A shrinking GDP reflects a slowing economy, with reduced production and potentially fewer jobs being created, an issue we can see in the following indicator.

7. Unemployment rate

The unemployment rate shows the percentage of people actively looking for work but unable to find it. In the second quarter of 2024, Argentina's unemployment rate rose to 7.6%, up from 6.2% in the same period of 2023. This equates to approximately 1.7 million unemployed individuals, an increase of 383,000 compared to the previous year.

Although the unemployment rate showed a slight decrease from 7.7% in the previous quarter (-0.1 p.p.), the labor market remains strained. The actual rate was slightly higher than the expected 7.4%.

This unemployment rate aligns with the contraction in GDP discussed previously. The unemployment rate in this second quarter is largely attributed to an increasing number of individuals entering the job market but struggling to find employment. Young women were particularly affected, with their unemployment rate rising from 13.4% to 16.5%.

The data released in September presents a mixed picture. On the positive side, industrial production, capacity utilization, trade balance, and PPI exceeded expectations, signaling some resilience in the economy. Although the CPI came in slightly higher than expected month-on-month, the year-on-year trend continues to decline, which is a promising sign. Policies like the reduction of the Impuesto PAIS could further ease inflation, as indicated by the leading PPI indicator.

However, challenges remain. The GDP and unemployment figures underperformed relative to expectations, reflecting ongoing strains in the economy. If the positive trends in other indicators continue, we may see improvements in GDP and unemployment numbers in the future as the impact of policy reforms becomes more pronounced.

As we can see, the path to controlling inflation while fostering economic growth is not straightforward. The Milei government is actively testing policies aimed at reducing taxes, cutting bureaucracy, and lowering public spending. These policies are being put to the test, and only time will tell if they deliver the intended results, so far, we have some indicators that are showing positive trends.

Website | X | Discord | Telegram | Github| YouTube