MercoPress. South Atlantic News Agency

Bad news for Argentina: economy contracts and industrial production slumps

Dollar deposits in Argentine banks have slid 39% since last October

Argentina's economy contracted in May and industrial production slumped further in June, according to government data released on Friday. Economic activity fell 0.5% in May year-on-year, slowing from April's 0.6% growth rate and marking the first contraction in 34 months.

Argentina’s economy is decelerating sharply after strong growth rates for much of the past nine years. High inflation, a sluggish global economy, waning demand from neighbouring Brazil, falling grains production as well as new trade and currency controls have prompted the slowdown.

“Stagflation arrived with a vengeance. Argentina now has the weakest economy and the highest inflation in the hemisphere,” wrote Alberto Ramos, a senior economist at Goldman Sachs, adding that private estimates put inflation at closer to 24% a year.

Argentina has been under fire for years over the accuracy of its official economic data, particularly on inflation, but a recent shift to growth statistics that seem closer to reality has also raised eyebrows.

Economic growth in the last 12 months is now pegged at 6.1%, down from 8.9% in December 2011, according to the government's EMAE economic activity index, a close proxy for GDP: In May, the economy grew 0.2% compared with April.

Despite the slowdown, inflation expectations have remained at over 30% a year, according to a monthly survey by the Torcuato Di Tella University.

At the same time, consumer and business confidence have taken a hit due to a virtual ban on foreign currency purchases and government import restrictions that have caused some shortages of goods and parts for domestic production.

Dollar deposits in Argentine banks have slid 39% since the government first imposed currency controls in October 2011, according to central bank data published on Friday. Argentines have been burned in the past by government freezes on bank deposits.

Also on Friday, the Economy Ministry said Argentina posted a primary budget deficit of 726.2 million Pesos (159 million dollars) in June, narrower than a surplus of 933.8 million Pesos in the same month a year ago.

Industrial production, which was a key driver of growth, has fallen for three straight months in year-on-year terms. The Indec stats agency said factory output sank 4.7% in June year-on-year, a touch below May's 4.6% decline. That marked industry's worst performance since January 2009. In the first half of this year, Argentina's industrial production fell 0.6% compared with the same period of 2011, Indec said.

The country's auto sector fuelled years of strong industrial growth, but waning Brazilian demand has sent output plummeting. Indec said auto production sank 30.9% in June year-on-year and 12.7% versus May. Factory output fell 0.1% in June versus May, according to seasonally adjusted data.