Argentina May Activity Falls as Upgrades Boost Debt Case

Argentina’s economic activity fell 0.5% in May from the previous month, missing economist estimates of a 0.2% increase. The monthly decline marks the second consecutive contraction, according to government data published Wednesday.

Compared to a year ago, the gross domestic product proxy eked out a 0.2% gain, falling well short of the 2.5% median forecast. The weakness was concentrated in employment-heavy industries, with manufacturing and retail retreating while agriculture and mining drove annual growth.

This divergence highlights a persistent two-speed economy under President Javier Milei. While first-quarter GDP grew 0.7% on consumer spending, the underlying picture remains fractured. Record energy, agricultural and mining exports are fueling headline growth, yet tepid domestic demand—evidenced by weak imports and tax revenues—continues to weigh on the broader economy.

The uneven expansion is taking a toll on the labor market, with the formal workforce shedding nearly half a million jobs and unemployment climbing. “Another monthly contraction in May reflects volatile Argentine activity data more than a fundamental shift in the country’s growth trajectory,” said Bloomberg economist Jimena Zuniga. “The data support our view that the agriculture- and mining-led expansion will remain solid, rather than spectacular. Strength in these sectors continues to be offset by weakness in manufacturing, limiting positive spillovers to the broader economy.”

For fixed-income investors, the immediate market impact of the monthly contraction is overshadowed by Argentina's improving sovereign credit profile. Moody’s Ratings became the third and final major agency to lift the country’s credit score on Tuesday. The upgrade strengthens the case for Argentina to finally return to international debt markets, a major milestone for the administration.

The disinflation trend provides additional ballast for the credit thesis. Consumer prices rose in June at the slowest pace since August, marking the third straight month of easing inflation.

Economists surveyed by the Central Bank in June project the economy will expand for a second straight year in 2026, driven by those same export sectors. They forecast 3% growth for the year, with year-end inflation expected to decelerate to 30%.

However, the structural weakness in domestic employment poses a lingering risk to this outlook. “Investors remain concerned that uneven growth could eventually lead to a political shift next year,” Morgan Stanley analysts led by Fernando Sedano wrote in a July 10 note. The bank expects growth to become less heterogeneous as construction activity increases, real wages recover, and credit modestly resumes later this year.