The National Statistics Office has released the data on the gross domestic product for the whole of 2004. This shows an increase in the GDP in real terms of 1.5 per cent, following a negative growth rate of 1.8 per cent in 2003 and 1.7 per cent in 2001 and a positive growth rate of 2.2 per cent in 2002.
This sounds very much as though our economy is on a roller coaster drive, but it reflects the international economic situation, where international experts have not managed to agree on whether we have emerged from the recession conditions that have characterised the main economies in the world since the end of 2000.
Exports of goods and services continue to be a key driver, probably the most significant driver, of GDP growth. In fact, over the five-year period 2000 - 2004, exports of goods and services were between 93 per cent and 95 per cent of the GDP in real terms.
It is worth noting that when exports as a percentage of GDP fell to 93 per cent, we had negative growth rates, while when it hit the 94 per cent or 95 per cent level we had positive growth rates. This certainly implies that it is indeed our exports that are contributing principally to our economic growth.
This makes the relationship between our economy and the international economy even more understandable, in that an international economic slowdown leads to reduced exports which in turn lead to lower GDP growth. The reverse is obviously also true as could be seen in 1999 and the first part of 2000, when we had stronger growth as the international economy was passing through an expansionary phase.
However, this relationship also indicates that any deviation of resources from our export activities to other activities brings about reduced growth levels. Growth arising from domestic demand is not as positive as growth arising from external demand.
Another important component of GDP growth is gross fixed capital formation, which is the term used to denote investment. In 2004, gross fixed capital formation represented 22.4 per cent of GDP; in 2003, the relative figure was 20.9 per cent; in 2002, it was 13.9 per cent; in 2001 it was 18.6 per cent.
There appears to be a direct correlation between investment in one year and growth in the economy in the following year. In fact the low level of investment in 2002 (13.9 per cent) of GDP led to a negative growth rate in 2003, while a relatively higher level of investment in 2003 (20.9 per cent) led to a positive growth rate in 2004.
Admittedly this correlation may not always exist but the expectation is that the higher level in investment in 2004 should lead to a faster growth rate in 2005. The level of investment in 2004 was the highest registered since 2001, and unless exports take a nosedive this year, this development should yield positive results. Students of economics refer to this as the accelerator theory.
If the increased investment is in activities that are export-oriented, it would be better, as it would enable the economy to grow faster both as a result of the increased investment itself, as well as a result of the subsequent increase in exports of goods and services.
The significance of domestic demand as a contributor to economic growth should not be underestimated. In 2004, total final consumption expenditure (which includes household consumption expenditure and general government consumption expenditure) represented 86.5 per cent of GDP. In 2003, the relative figure was 87.1 per cent; in 2002 it was 83.6 per cent, in 2001 it was 85.3 per cent. In this case the indication is not so clear but there seems to be a situation whereby a relatively higher level of domestic demand is not conducive to faster economic growth. This appears to be even more so with regard to government consumption expenditure, which in 2004 reached 20.9 per cent of GDP compared to 21.1 per cent in 2003.
It is difficult to establish the structure that our gross domestic product should have. However, I would like to make an attempt on the basis of the data for the past four years and what I believe has contributed to a faster level of growth:
¤ We should seek to have as a minimum a level of exports not less than 95 per cent of the GDP.
¤ Gross fixed capital formation should not be less than 22 per cent of GDP.
¤ Total consumption expenditure should not exceed 82 per cent of GDP, with general government expenditure not exceeding 20 per cent and the remaining 62 per cent made up of household consumption expenditure.
¤ This would gives us a total of 104 per cent and thus imports would be 99 per cent of GDP.