UPDATE 2-Argentina's economy grows in second half of 2016, exiting recession

(New throughout, adds comment, background on Argentina politics, details from report)

BUENOS AIRES, March 21 (Reuters) - Argentina’s economy exited a prolonged recession in the second half of last year, with government data on Tuesday showing a 0.5 percent expansion in the fourth quarter of 2016 compared with the third quarter.

The Indec statistics agency also revised its estimate for third-quarter GDP to a 0.1 percent increase over the second quarter, up from a 0.2 percent decline previously. Taken together, the data show Argentina’s economy grew in the second half after shrinking for three straight quarters.

Center-right President Mauricio Macri’s administration is hoping an economic recovery ahead of midterm elections in October can boost flagging approval ratings. His “Let’s Change” coalition has been trying to convince voters to give Macri a chance to continue its agenda of market-friendly reforms.

“That’s going to be a large part of the narrative ahead of the elections later this year,” said Neil Shearing, chief emerging markets economist at Capital Economics in New York.

Macri took office in December 2015 after more than a decade of populist rule left Argentina with rampant inflation, dwindling central bank reserves and a wide fiscal deficit.

The economy declined in the fourth quarter of 2015, and fell into recession in the first half of last year. Some of Macri’s reforms aimed at cutting the deficit and encouraging investment, including letting the peso currency float and cutting subsidies, deepened the recession by gutting consumers’ purchasing power.

Popular frustration over these policies has grown in recent months, with a poll this weekend showing more Argentines disapprove of Macri than approve for the first time since he took office. The country’s largest labor union has called a general strike for April 6.

Indec’s Tuesday report highlighted the challenge Macri faces in ensuring the recovery is felt on the streets. While the agricultural sector and exports grew compared with the fourth quarter in 2016, retail and wholesale commerce fell 2.5 percent.

“It’s going to be quite tough for a while because of subsidy reform, because consumers aren’t leading this recovery,” Shearing said. “It’s a tricky balance for the government.”

The economy shrank 2.1 percent in the October-to-December period compared with the fourth quarter of 2015, the third straight quarterly decline, Idec said. It shrank 2.3 percent overall in 2016 compared with the prior year, Indec said.

Argentina’s government expects the economy to grow 3.5 percent in 2017, though private economists see growth slightly lower at 3 percent. (Reporting by Luc Cohen; Editing by Meredith Mazzilli, Chizu Nomiyama and David Gregorio)