Significance: The stellar GDP expansion observed in the second quarter responds to good performance across all sectors except mining, but it is agriculture that leads the expansion, rebounding after last year's droughts.

Implications: The agricultural sector, which represents 8.7% of overall GDP, advanced by 65%, contributing 5.6% to total growth.

Outlook: At IHS Global Insight, we expect the economy to expand 8.2% in 2010 before decelerating to 5.2% in 2011.

According to the latest national accounts data released by the Argentine statistical office, the economy jumped 11.8% year-on-year (y/y) in the second quarter of 2010 and posted a 3.0% change with respect to the previous quarter on a seasonally adjusted basis. Global demand was propelled by an 18.1% advance in capital formation, with investment in plant and equipment advancing 35.5% y/y and construction growing 8.1% y/y. Good results were observed across the other categories. Government consumption continues to be a growth engine, expanding 12.9% y/y, while household consumption grew 8.1% y/y. Performance in the external sector raises some concerns, with total imports jumping 35.6% y/y, while exports only did so by 18.2% y/y; nevertheless, the latter result is substantially better than the 4.2% expansion observed in the previous quarter. While the impact is not that dramatic from the terms-of-trade perspective, the jump in imports confirms the economic rebound, with important advances across all import categories, at the expense of a shrinking trade surplus in the coming quarters.

The goods-producing sector advanced 18.3% y/y in the second quarter thanks to a solid recovery in manufacturing activities (up 9.9% y/y), and agriculture (up 65.0% y/y), the latter the result of a low comparison base in 2009 when the sector suffered from adverse weather conditions. In fact, agriculture retreated by 27.1% during the second quarter of 2009. The growth rate in the service sector accelerated to 8.2% y/y, driven by advances in transportation (up 11.3% y/y) and commercial activities (up 12.0% y/y), with important contributions from other sectors. The advances observed in manufacturing, commerce, and agriculture suggests that these labour-intensive sectors will be increasing their demand for labour in the coming months, improving the outlook for the overall economy.

According to the consumer confidence index (ICC) drawn up by the Universidad Torcuato Di Tella, confidence in August advanced 4.6% with respect to July, while in annual terms, it remains 23.8% higher. Perceptions of personal finances advanced 7.1% in August, while consumers' views about macroeconomic conditions and timing for the purchase of durable and non-durable goods advanced 2.4% and 4.0%, respectively. This suggests that household expenditure should remain strong in the third quarter of 2010, good news considering the negative impact coming from external accounts and weaker fiscal position. A survey on consumers' inflation expectations for the coming 12-month period shows that the median inflation expectation remains at 25.0% for August 2011, while the average expected inflation rate increased slightly to 32.8%.

Outlook and Implications

The economy is growing fast again. The strong economic expansion observed in Argentina during 2003–08 called a short-lived truce in 2009, as deteriorating economic conditions worldwide took their toll on Argentine exports and, later, on household consumption. Economic expectations improved during the last quarter of 2009 because of an apparent change in policymaking, and not even the removal of the central bank president in early 2010 without following proper procedure derailed the process. Some deceleration in activity levels is expected in the second half of 2010, with the outlook for 2011 and beyond very much linked to the evolution of the global economy, particularly Argentina's main trade partners. Returning to the financial market is important for the government, but especially for companies located in Argentina and for its provincial governments, which have suffered a lack of financing sources since 2001. Improving the business climate under current conditions would be a big plus for the economy. So far only a few provinces and cities have issued new debt, with more to follow in the coming months. At IHS Global Insight, we expect the economy to expand 8.2% in 2010 before decelerating to 5.2% in 2011.