Argentina Economy Plunges Most Since 2009

Argentina’s economy shrank 5.8% in May versus the same month last year, government statistics agency Indec said, the second straight month of declines in a sign of looming recession and a possible GDP contraction in 2018.

The sharpest monthly decline since July 2009 was mostly caused by the grains powerhouse’s worst drought in decades, which harmed soybean and corn crops. Farming activity shrank 35% year-over-year, while industrial output fell 1.4% and transport and communications fell 4.9%, Reuters reported.

The drought was one factor behind a run on the peso currency and financial market volatility that prompted Argentina to turn to the International Monetary Fund for an emergency loan. Argentina has also suffered from a broader investor pullback from risky emerging market assets.

While the government began the year with rosy forecasts of growth above 3% this year after a 2.9% expansion in 2017, many analysts began predicting a recession—two straight quarters of negative growth—for 2018 after the country announced in May it was turning to the IMF.

The fund still expects a slight expansion of 0.4% in 2018, and the government says it could be even higher. But May’s decline—which exceeded the median estimate in a Reuters poll for a 1.3% contraction—increased the chances that overall growth could be negative despite a strong first quarter.

“We see a very significant risk that the economy will experience a recession in 2018 ... and that real gross domestic product growth in 2018 will dip into negative territory,” Alberto Ramos, head of Latin America economics at Goldman Sachs, wrote in a note.

Tighter fiscal policy as the government cuts public works spending to reach its deficit targets and high interest rates as the central bank seeks to fight incessant inflation mean the economy would “remain soft in coming quarters”, Ramos wrote.

Construction activity rose 4.4% in May, down substantially from the 10.2% increase in April, while wholesale and retail commerce rose 0.5% compared with 5.5% in May. The financial sector grew 10.8% and real estate activity grew 4%. Economic activity declined 1.4% when compared with April, the data showed.

Indec also revised its estimates for April’s economic activity to a 0.6% decline year-over-year, compared with 0.9% previously, and a 2.8% decline month-on-month, compared with 2.7% previously.