Argentina's Economy Expanded 0.3% in First Quarter

By Taos Turner Features Dow Jones Newswires

Argentina's economy grew tepidly in the first quarter, expanding 0.3% from a year ago as businesses and consumers struggled to cope with high taxes and double-digit inflation.

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The rate of growth, reported by the national statistics agency on Wednesday, is lower than government officials had initially forecast for this point in President Mauricio Macri's administration. It also means Argentina may find it harder to meet a 3.5% annual growth target included in its 2017 budget.

"The economy is going from one that was clearly a pro-consumption-based model to one that is investment driven," said Rodrigo Álvarez, director of Analytica Consultora, an economic research firm.

"The challenge for the government is to ensure that investment boosts growth at a time when consumption is not gaining traction," Mr. Álvarez said.

The economy grew 1.1% from the fourth quarter of 2016.

After taking office in December 2015, President Macri replaced the policies of his populist predecessor, Cristina Kirchner, with market-friendly measures to induce investment. Argentina's economy stalled during Mrs. Kirchner's second term and per capita output is now 6% lower than it was half a decade ago, Mr. Álvarez said.

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Executives have hailed Mr. Macri's policies, including tax cuts and deregulation, and sectors such as agriculture and banking benefited immediately from the elimination of currency controls.

Farmers have been investing more in everything from trucks to cattle and fertilizer equipment. Argentina is looking at a record harvest and some rural areas are growing quickly. But in other sectors investors have remained on the sidelines, saying they prefer to wait it out and see if Mrs. Kirchner or her policies could make a comeback in a midterm election in October.

Earlier this week, the MSCI Emerging Markets Index postponed a decision to include Argentina in its emerging market stocks category. The MSCI said Argentina meets most of the criteria needed to appear in the index but that it is unclear if Mr. Macri's policies will stand the test of time.

Retail sales have declined almost constantly since Mr. Macri took power as consumers safeguard their cash to pay for higher gas, electricity, water and transportation prices. Economists say higher utility rates, approved by Mr. Macri, have boosted investment in such services, but consumers and small-business owners are wondering when they too will benefit.

On Monday, Mrs. Kirchner held a large political rally, surrounding herself with people who she said were struggling to make ends meet. She hinted that she may run for Congress in October's election.

Mr. Álvarez says investors are pouring money into oil, gas and renewable energy. Meanwhile, the government is increasing spending on roads, bridges and airports while and a new home mortgage system is leading to increased construction.

But car makers and other manufacturers are struggling to increase output amid weak demand from Brazil, Argentina's top trade partner.

Mr. Álvarez expects the economy to grow between 2.7% and 3% this year, led by a robust turnaround in farming, construction and transportation. A recent survey of analysts surveyed by FocusEconomics put growth at 2.6%. Economists also expect the annual inflation rate to decline to close to 21% from about 37% last year.

Foreign investment could pick up this year and next if Mr. Macri's Pro party does well in the October election. A decelerating inflation rate should also help boost consumer spending as companies raise salaries during annual collective bargaining agreements.

"Economic growth wasn't brilliant in the first quarter, but if you keep in mind what's happening in Brazil and the negative legacy of the previous government, then growth doesn't look all that bad," Mr. Álvarez said.

Write to Taos Turner at taos.turner@wsj.com

(END) Dow Jones Newswires

June 21, 2017 21:01 ET (01:01 GMT)