The economy in the first quarter

The just-released national accounts figures for the first quarter provide a mixed picture of an economy that continues to face challenging times on the international front. Although the real GDP declined by just under two per cent in January-March 2003, a look at the components reveals a number of encouraging developments.

While exports were flat, imports rose substantially. Although a higher import bill reduces the GDP, what pushed up the import bill were mostly capital items and intermediate products.

There's a silver lining. Restocking and faster capital formation would suggest that the picture painted in most recent national-accounts statistics - slow growth in the fourth quarter and the negative growth of the most recently announced quarter - will not be long-lasting.

Investment

Investment in the capital stock - gross fixed capital formation - during the first quarter of 2003 amounted to Lm98.3 million. This was sharply up on the same quarter of 2002, and higher than in even the banner year of 2000. Corrected for price changes, the figure for gross fixed capital formation was up 10.2 per cent on the previous year's, though it was below the comparable figures for 2000 and 2001.

One quarter does not make a trend, and next quarter's numbers will be interesting to watch out for, particularly in the light of the fact that last year's second quarter figures, against which the next quarter will be judged, were quite strong.

Within the investment category, the NSO publishes separate numbers for construction and machinery. Construction investment was up by 5.8 per cent, while investment in machinery rose by 13.3 per cent.

Consumption increased by a moderate 1.8 per cent after correction for inflation. Developments on the external side were less straightforward. Exports declined by just under one per cent in real or price-adjusted terms, though in liri or nominal terms they were almost unchanged from the same quarter of the previous year.

From a separate source, the external trade figures, we know that exports of goods rose by a nominal 2.5 per cent in the first quarter. This suggests offsetting declines in other areas of Malta's exports.

Export prices, which increased by 0.9 per cent over the quarter, have exhibited a certain degree of volatility. Export prices fell substantially in 2001, and then remained unchanged in 2002.

In nominal terms, unadjusted for price changes, imports rose from Lm338.3 million to Lm368.5 million, a substantial increase of 8.9 per cent. Imports are recorded negatively in the national accounts, and the import rise was an important contributor to the GDP decline. Import prices were slightly lower, so that in real or price-corrected terms, imports were estimated to have risen by 9.1 per cent during the quarter.

We can turn again to the trade figures to check the components of the imports rise. In the March quarter, imports of industrial supplies rose by a remarkable 12.5 per cent. The bulk of these imports consists of semi-finished supplies and these rose by 13.6 per cent. To the extent that such restocking presages a pick-up in production, one would tend to conclude that the drop in GDP during the quarter will not be sustained in later quarters. In a similarly positive development, imports of capital items were up by a healthy 13.2 per cent.

Profits and wages

The national accounts look at economic performance from two angles. They measure output in a classification that distinguishes between different buyers: consumers, government and so on. They also measure the earnings generated in the production of that output. Earnings come in two broad forms: employment income and profits.

Employment income was unaffected by the quarter's slowdown. During the first quarter, employment income was up 4.9 per cent on the same quarter of 2002. The increase was in line with employment growth: the recently issued Labour Force Survey reported a 3.4 per cent increase in employment over the 12 months ending in March 2003.

The national accounts also show that the profits dropped by 6.4 per cent. Some sectors, like the wholesale and retail trades, had a profit increase. Profits in other sectors, including manufacturing, declined. In effect, profit margins absorbed the slowdown in economic activity.

The flow of profits abroad was also affected. First-quarter balance of payments information, published earlier, showed that the outflow of investment income, mainly profits repatriated to foreign owners of firms located in Malta, dropped from Lm81.6 million in January-March 2002 to Lm61.1 million in the same months of this year.

This also explains why the paths of the GDP and GNP diverged somewhat over the quarter. While the GDP declined by 1.9 per cent, the GNP increased marginally by 0.1 per cent. The GNP excludes investment income flows out of Malta, while they are included in the GDP. The GNP includes investment income that flows from abroad into Malta, while the GDP does not.

As I have mentioned, this last quarter was one with a reduced outflow of investment income, and it was also one where the inflow of investment income declined in line with falling international rates of return.

The difference between GDP and GNP can be stated in other words. Incomes earned inside Malta, including that relatively small part earned by foreigners (such as that of foreign multinationals operating here) declined by 1.9 per cent. On the other hand, income earned by Maltese residents increased marginally, whether earned here or abroad (the latter including the income received by the Maltese from their foreign investments).

One quarter's statistics cannot provide a complete reading of the economy. One should not read too much into one quarter's decline. There is no need to press the alarm button, although it is a reminder of the importance of staying efficient in an increasingly competitive world.

Stable export levels can be seen as a sign of the resilience of an open economy in a weak international setting. During this particular quarter, a small drop in production was absorbed by reduced profits, as reflected both in the national profits figure and in the reduced outflow of repatriated profits.

Persistent profit shrinkage would be inconsistent with a greater investment that is needed for economic growth, but this particular quarter's decline has to be viewed in the light of the record profits reported in 2002.

EU parliament

This week in the European Parliament tempers flared and words were uttered which do not reflect well on the usual level of discourse in this institution. The Italian Presidency got off in a cloud of controversy which it could easily have done without.

Being there and following the exchanges, some heated others almost humorous, makes one recognise how easily side-tracked serious discussion can be. The Italian Presidency's opening statement had a number of elements which deserved further elaboration and discussion. Instead, Mr Berlusconi's reaction to a stinging attack - which he could probably have ignored - became the centrepiece of the day's events.

I certainly do not think Mr Berlusconi really intended any disrespect to others except Mr Schulz. Whether this was over the limits, others will decide, but it seems to me that Mr Berlusconi's reaction wasn't all that ironical, nor that relevant, since Mr Schulz is known as one who campaigns vigorously against war and the use of force.

So in the end, the only loser was the Italian nation, which has so much to offer with a new Treaty of Rome on the cards. Yet, it started the Presidency in such unnecessary controversy! Let us hope it will end it in full honours.