For more than a year, Mauricio Macri has been pursuing far-reaching economic reforms: the country has returned to international financial markets, numerous taxes have been eliminated, energy prices and exchange rates have been deregulated, and the quality of statistics has been improved. The brisk pace of reforms initially sent the country into recession and triggered high inflation. But the expected benefits of the reforms are finally taking shape: the confidence of international investors is facilitating government financing, economic growth is picking up and inflation has begun to ease.
Renewed growth
In 2016, the economy contracted 2.3%. This recession can be attributed to both external and domestic factors.
Exports increased only moderately in volume terms due to the economic problems of Brazil, Argentina’s main trading partner. They did not increase as fast as imports, and as a result, foreign trade made a negative contribution to growth in 2016.
On the domestic front, poor weather conditions and sluggish investment undermined the primary sector, which made a negative contribution to activity. But the main reason for the recession is Mauricio Macri’s radical reform programme. The strong surge in inflation in the first half sharply eroded household purchasing power, which has been the main growth engine in recent years. Investment also contracted, squeezed by a restrictive monetary policy. Despite Mauricio Macri’s stated desire to improve public finances, higher public spending helped limit the scope of the recession.
Since year-end 2016, most indicators signal a gradual improvement in the economic situation, and suggest that the reforms are beginning to pay off. Technically, the country has pulled out of recession. GDP increased in the second half of 2016, although on a year-on-year basis, growth was still negative. Investment is expected to rebound in 2017, buoyed by higher public investment, notably in infrastructure, and by the expected return of foreign investors, encouraged by the progress of reforms. The slowdown in inflation raises hopes for a rebound in consumer spending.
Agricultural production will get a boost from good weather conditions. The gradual improvement in Brazil’s economic situation should favour exports in 2017 and 2018. For these reasons, we estimate growth at 3% in 2017 and 3.5% in 2018.
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by François FAURE