July 20, 2012 / 9:51 PM / 7 years ago

WRAPUP 3-Argentina economy shrinks in May for first time since 2009

* May economic activity falls 0.5 pct yr/yr

* June industrial production down 4.7 pct

* Gov’t blames global crisis for sharp slowdown

* Analysts warn of stagflation

By Hilary Burke

BUENOS AIRES, July 20 (Reuters) - Argentina’s economy contracted in May while industrial production slumped further in June, data showed on Friday, the weakest performance for both readings since a global crisis shriveled growth in 2009.

Economic activity fell 0.5 percent in May year-on-year, slowing from April’s 0.6 percent growth rate and marking the first contraction in 34 months, government data showed on Friday.

The figure matched the median forecast in a Reuters poll of analysts.

Latin America’s No. 3 economy is decelerating sharply after posting China-like growth rates for much of the past nine years. High inflation, a sluggish global economy, waning demand from neighboring 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 percent 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 percent, down from 8.9 percent in December 2011, according to the government’s EMAE economic activity index, a close proxy for gross domestic product.

In May, the economy grew 0.2 percent compared with April.

Despite the slowdown, inflation expectations have remained at 30 percent 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 percent 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) in June, narrower than a s urplus of 933.8 million pesos in the same month a y ear ago. [ ID :nL2E8IKFRQ]

RECIPES

May’s economic activity fell 1.2 percent, according to measurements by Orlando J. Ferreres & Associates consulting firm, which foresees a steep 3.9 percent drop in June.

“Growth so far in 2012 has been nil,” Ferreres said in a report. “While Argentina’s economy hasn’t entered into recession for the moment, the economic contraction can be confirmed in ... the lower level of industrial production, a smaller grains harvest (and) the decline in housing and cement sales.”

Although external factors could improve in the second half of the year — including revived Brazilian demand for Argentine autos — Ferreres & Associates said internal variables hurting growth would stoke uncertainty in the coming months.

Deputy Economy Minister Axel Kicillof rejected such doomsday predictions on Friday, saying Argentina was taking preventive measures to protect against fallout from the global crisis.

Argentina’s unorthodox economic approach centers on heavy state participation in the economy to foment high growth, job creation and domestic demand. The government does not publicly acknowledge the cost of this, which is double-digit inflation.

“We are taking active policies, using our own resources, to generate the virtuous cycle of spending, consumption, investment. You have more demand, more production and that feeds back into more spending, more production, more consumption.”

“That’s the recipe that has served us well, and in this tragic global context, it will continue serving us well,” he said in a televised speech.

Kicillof helped devise Argentina’s seizure of a controlling stake in top energy company YPF, a move that outraged Spain’s Repsol.

INDUSTRY OUTPUT

Industrial production, which was a key driver of growth, has fallen for three straight months in year-on-year terms.

The INDEC statistics agency said factory output sank 4.7 percent in June year-on-year, a touch below May’s 4.6 percent decline. That marked industry’s worst performance since January 2009.

Analysts expected a 3.9 percent year-on-year decline in June, according to a Reuters poll.

The country’s auto sector fueled years of strong industrial growth, but waning Brazilian demand has sent output plummeting. The INDEC statistics institute said auto production sank 30.9 percent in June year-on-year and 12.7 percent versus May.

The government said factory output fell 0.1 percent in June versus May, according to seasonally adjusted data.

In the first half of this year, Argentina’s industrial production fell 0.6 percent compared with the same period of 2011, INDEC said.

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