Distortions hold back growth

We forecast that the economy grew by 4.7% in 2013. Progress was helped by strong agriculture output and robust domestic consumption that was supported by an expansionary fiscal stance and buoyant credit growth. But high frequency indicators of recent months show that the economy slowed in the second half of 2013. High inflation is damaging Argentina’s international competitiveness, and we expect to see some weakening demand for exports in the coming months. Policyinduced distortions (such as price controls making some industries less competitive on world markets), inflation and interventions have progressively undermined the private sector, and GDP growth in 2014 is forecast to slip back to 1.2%.

Argentina faces several structural challenges that need to be overcome if it is to achieve its full growth potential. In the medium term, domestic activity will be held back by rising inflation and the impact of numerous policy-induced economic distortions. Some progress is being made, including new legislation for the oil sector that creates more flexible conditions for companies wishing to repatriate earnings. But while inflationary pressures and policy distortions remain, growth is unlikely to exceed 3.5% a year. Because the country is rich in natural resources and has a well-educated workforce, reform could raise potential growth above 4%.

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