Non-seasonally-adjusted industrial production in October was 2.6% higher than in September. In September, industrial output fell by 1.4% on August. Year-on-year the comparison looks impressive. Output was up 16% in October and 16.8% for the first 10 months of the year.
A surge in construction is driving growth. Output of construction materials was up by 9.5% on September. For the first 10 months the sector's output is up by 27%. The other sector that is recovering strongly is textiles (excluding man-made fibres). This sector is up by 81% in the first 10 months of the year, though month-on-month the industry was up by just 0.6% in October. The comfort in this is that, at last, the man-made fibre part of the industry is recovering. This subsector was up by 4.6% month-on-month, even though for the year as a whole it is down by 2%.
According to the government, overall economic output is now at the same level it was in 1999. Independent economists point out, however, that even if growth next year is 6%, it will still take until 2006 for the economy to get back to where it was in 1998, the peak year for output. If the growth rate next year is 4%, the economy will not get back to its 1998 level until 2007.
Whether the country will be able to keep up the current rate of recovery is unlikely. At some point the government is going to have to make its creditors a realistic offer. If it fails to do this, not only will Argentine assets start to be impounded, but also the economy will be starved of credit and investment. With government debt equivalent to 150% of GDP, the debt burden is clearly unsustainable. The government's attempt to force creditors to accept its terms looks misguided
There is considerable evidence that domestic demand will continue to drive the economy forward for a bit longer. The government announced that the budget for public works would increase by 50% next year and this will clearly keep the construction sector humming. Nevertheless, concerns remain over the medium-term prospects for other sectors.
Industry as a whole was operating at 69.1% capacity in October, its highest level for two years. As demand increases in line with a recovery in consumer spending, output should rise further. This will in turn require investment to increase capacity. Levels of investment, however, are still very low due to a lack of credit and the still-uncertain business environment. As factories reach the limit of their capacity, the scope for further easy growth will be limited. Businessmen will have to take risks and invest if the recovery is to continue.
One encouraging sign is the pick-up in bank deposits. A total of Arg$3bn (US$1.05bn) was deposited in banks over the month, with private deposits accounting for Arg$1.6bn. According to the Fundación Capital consultancy, almost all the private money invested in October went into current accounts or short-term savings accounts. It was the third straight monthly rise in deposits.
GDP growth
The economy has now grown by 7.3% over the first nine months of 2003, and the government's target of full-year GDP growth of 7% or more looks feasible. September's growth rate showed how demand-led the recovery is becoming: industrial output fell by 1.4% on August. The pick-up in the domestic economy is beginning to suck in imports. In September, imports were the highest for the year so far (at US$1.3bn). This was almost twice the January import bill of US$799m. Exports, meanwhile, have stopped rising. Indeed, in August and September they were down at the US$2.4bn level compared with the US$2.8bn level of the previous three months.
The pick-up in the domestic economy is improving the tax position. The primary fiscal surplus stood at Arg$8.2bn (US$2.85bn) for the first 10 months of 2003. This is already above the IMF's target for a full-year surplus of Arg$7.8bn. Treasury secretary Carlos Mosse said that the government would use this excess cash to fund a recently-announced increase in private-sector wages, pensions, and social security payments.
The lower chamber of congress approved the government's budget for 2004. At the same time, a law has been passed allowing the government to make changes to expenditure as and when it sees fit. The law enables the head of the cabinet, at present Alberto Fernández, to make changes to spending plans without consulting congress. He can redistribute funds on an ad hoc basis and also would not have to seek approval for how he wants to use any excess revenues the government might receive.
Opponents claimed that the new legislation was unconstitutional. At the end of a marathon 24-hour session, the law was eventually passed by 90 votes in favour to 74 against and seven abstentions. The ruling Partido Justicialista, which introduced the bill, appears to have struck a deal with the main opposition party, the Unión Cívica Radical, to get the legislation through.
The budget now goes to the senate in the last week of November. Moreover, the enhancing of Fernández's role means the president will retain a strong grip on the economy. The economic state of emergency, which was extended for another year on 12 November, also gives the government formidable powers over the economy.
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