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ECONOMY | 06-03-2019 18:42

OECD: Argentina's economy will shrink in 2019, but less than expected

A report published by The Organisation for Economic Co-operation and Development on Wednesday anticipates economic contraction for Argentina and reductions in global economic growth this year

The Organisation for Economic Co-operation and Development (OECD) has revised its forecast for Argentina's economy, predicting in a new report that GDP will contract by 1.5 percent this year, before returning to growth in 2020.

According to the OECD, the recession will continue into this year, although it will not be as severe as experienced in 2018.

"Production continues to contract in Argentina, after the financial crisis that the country experienced last year and the subsequent hardening of fiscal and monetary policies," said the international body.

In 2020, however, GDP is expected to grow by 2.3 percent, the OECD said, pointing to agricultural production and exports, which should help a "soft recovery" in 2019, despite low domestic demand.

This may come as somewhat of a boon to President Macri, as it predicts improvement lies ahead, lending him a possible advantage in the upcoming elections.

Argentina has sought to become a member of the OECD since Preisdent Mauricio Macri took office in December, 2015. At the G20 Leaders Summit in Buenos Aires last December, the president once again reiterated that aspiration, which would give the government’s economic and social policies the seal of approval from a group that collects the most developed countries in the world.

However, Argentina has not yet received an invitation to begin the full process of becoming an OECD member.

The OECD’s economic predictions for this year are overall ‘weaker’ for those countries belonging to the G20 group of industrialised and emerging nations. The body says that emerging economies such as Turkey and Argentina require a more restrictive monetary policy to maintain investor confidence.

Its report on Wednesday argued that “the priority in these economies is to undertake reforms that improve the prospects for fiscal and financial sustainability in the medium term.”

The OECD's predictions are similar to those of the International Monetary Fund (IMF), which suggested in January that “Argentina’s economy will contract in 2019 as tighter policies aimed at reducing imbalances slow domestic demand, before returning to growth in 2020” in their World Economic Update assessment.

'Global economy facing increasingly serious headwinds'

The OECD also warned that due to global trade tensions and political uncertainty, the predictions for global economic growth had been reduced to 3.3 percent for this year, down from the 3.5 percent it predicted in November, which was itself a downgrade from 3.7 percent.

The 19-nation eurozone looks set to be hit particularly hard, with anticipated growth dropping from 1.8 percent to one percent.

The growth forecast for European powerhouse Germany sank to 0.7 percent from 1.4 percent, while Italy's fell from 0.9 percent growth into a recessive minus 0.2 percent.

The OECD said the sharp downturn in the two countries reflected "their relatively high exposures to the global trade slowdown compared with that of France," which slipped from 1.5 percent to 1.3 percent.

OECD chief economist Laurence Boone said the "global economy is facing increasingly serious headwinds.”

Only two countries among the analyzed states [Indonesia and South Africa] maintained the same index as the November publication, and Argentina was the only one that had an upward revision.

No-deal Brexit warning

Britain's growth forecast was chopped from 1.4 to 0.8 percent, which would mark the first time it had fallen below one percent since 2009 following the global economic crisis. 

However, the OECD emphasised that even this projection was based on the assumption of a smooth Brexit. If Britain crashes out of the European Union without a deal on future economic relations, the OECD said its outlook would be "significantly weaker."

With just 23 days remaining before the scheduled Brexit date March 29, the latest round of talks between Britain and the EU aimed at getting their deal through the British parliament ended on Tuesday.

On Wednesday, chief EU negotiator Michel Barnier said "no solution" had been found to break the deadlock.

The OECD warned that a disorderly no-deal Brexit would likely pitch Britain into a recession and the knock-on effects could spill over into Europe and beyond.

"OECD analysis suggests that the increase in tariffs between the two economies as a result of WTO rules coming into effect would reduce GDP by around two percent (relative to baseline) in the United Kingdom in the next two years."

"Although contingency measures to soften the impact of a no-deal outcome are being taken by both sides, UK-EU separation without an agreement would still be a major adverse shock for Europe and possibly elsewhere in the world".

"Substantial policy uncertainty remains in Europe, including over Brexit. A disorderly exit would raise the costs for European economies substantially," the OECD said.

US-China trade tensions

Meanwhile, trade restrictions imposed last year – notably by the United States and China –are "a drag on growth, investment and living standards, particularly for low-income households," the OECD said.

The world's two biggest economies are pursuing trade negotiations, but the OECD warned that other risks remain even if they do reach a deal, including potential US tariffs on European car imports.

"This would hit Europe particularly, where motor vehicle exports represent around one-tenth of total EU merchandise exports to the United States," it said.

Growth in China, which faces an economic slowdown, was revised down slightly to 6.2 percent from 6.3 percent for this year and was steady at six percent for 2020.

But the OECD warned that "a sharper slowdown in China would hit growth and trade prospects around the world".

"A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets," Boone said in a statement.

"Governments should intensify multilateral dialogue to limit risks and coordinate policy actions to avoid a further downturn."

- TIMES/AFP

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