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ARGENTINA: Limits to Economic Growth Loom

Marcela Valente

BUENOS AIRES, Aug 10 2010 (IPS) - The Argentine economy is making a rapid recovery after the impact of the global financial crisis last year, but experts warn about the limits to growth, which will reach a ceiling shortly unless investments increase.

After a year in which GDP grew by barely 0.9 percent, a far cry from the annual average of close to eight percent over the previous six years, economic activity in this South American country is back on track, led by industry, thanks to a buoyant domestic market and strong export performance, especially in agriculture.

The government initially forecast 2.5 percent growth this year, but later revised the figure upwards to seven percent, in line with the 6.8 percent projected by the Economic Commission for Latin America and the Caribbean (ECLAC).

The Southern Common Market (Mercosur), made up of Argentina, Brazil, Paraguay and Uruguay, will spearhead economic growth in Latin America this year, with an average rate of seven percent, according to the United Nations regional agency.

Although Argentina is part of this trend, the country is finding it hard to recover investor confidence, even after restructuring most of its outstanding debt.

In the first five months of the year, GDP grew 8.5 percent, according to the National Statistics and Census Institute. A good harvest — in contrast with the drought that devastated the countryside last year — and higher demand for vehicles on the part of the local automotive industry’s top client, Brazil, gave a healthy boost to the economy.

Another factor was the growth in domestic consumption driven by, for example, the introduction of the universal child benefit, a social protection plan which pays out 220 pesos (nearly 60 dollars) per child under 18 as long as they attend school and have their vaccinations up to date.

However, experts warn there are limits to this growth, which could enter a slower phase, though not a drastic recession, in 2011, after continued recovery for almost all of 2010.

The roots of the problem are to be found in the industrial sector, they say. According to consulting firm Abeceb, in the first half of the year, industrial activity grew by nearly 10 percent, which will mark the high point for the sector.

However, Abeceb’s chief economist Mariano Lamothe told IPS he is concerned about the lack of capacity to supply rising consumer demand over the next few months.

A report published by the firm in early August says “87.2 percent of industrial growth this year is due to car-making and the iron and steel industry.” Previously these sectors accounted for no more than 50 percent of industrial activity.

Now, many sectors are at the limit of their productive capacities, while only a few have reached record production levels, owing to extraordinary circumstances.

In Lamothe’s view, in the years prior to 2008 the Argentine economy was growing because some of its installed capacity was still idle, but now “there will be tension and the rate of growth will slow down” in the medium term.

But in the automotive industry, a record has been set. Production increased by 49.7 percent and exports rose by 53.7 percent in the first seven months of the year, with respect to the same period in 2009.

These figures were published this month by ADEFA, Argentina’s carmakers’ association, which also indicated that sales to local dealerships — in other words, domestic sales — rose 37.5 percent so far this year, compared to the same period in 2009.

As for the iron and steel industry, production increased by an average 47.6 percent in the first half of 2010 compared to the equivalent period in 2009, according to the Argentine steel-makers industrial association, CIS.

In contrast, other industries have fallen far behind, including food and beverage production, tobacco products, oil refining, and the metallurgical and chemical industries.

“It is worrying that the high growth rate for 2010 is only due to automobiles and steel,” Lamothe said. In the food industry, the problem is “the lack of clear strategic guidelines for the long term, to boost competitiveness,” he said.

One example is the meat industry. Beef production has fallen because of restrictions on exports, which led to lower slaughter capacity.

The Argentine beef industry chamber, CICCRA, reported that slaughter for the first half of this year was 22.4 percent lower than for the same period in 2009.

In line with the decline in supply and slaughter, beef production in the first half of 2010 was down by 20.3 percent with respect to last year, while exports fell by 41.9 percent compared with the same period.

Economists at the Ecolatina consulting firm agree that there is a limit to the present expansion, and point to a lack of investment and to the high demand for energy, which is exacerbated in the southern hemisphere winter.

Investment is being aimed at partially increasing existing production capacity, but not at major new projects that would substantially add to volume for the domestic or export markets, according to Abeceb.

Energy is also a limiting factor. Metallurgical, cement, textile, petrochemical and oilseed processing plants have suffered fuel supply interruptions in recent weeks because gas has been shunted to household heating during a series of bitter cold snaps.

This year’s economic growth contrasts favourably with the fall in production in 2009, but the limits to growth are looming sooner than predicted, and the economy could slow down as early as 2011, at least in comparison to the present feverish expansion.

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