The National Statistics Office this week published data of the gross domestic product for the years 2000 - 2004 and the first quarter of 2005, taking into account seasonal variations. Such an analysis makes it possible to assess short-term trends and the pattern of the business cycle.
Many countries provide such data and this often creates a debate as to whether an economy has moved into recession or not. In several developed economies, it is claimed that after two consecutive quarters of decline in seasonally adjusted GDP would mean that an economy would be passing through a recession.
The good news from the published data is that the Maltese economy does not seem to be in recession in spite of the fact that in the first quarter of this year real gross domestic product decreased by 5.86 per cent when compared to the last quarter of 2004.
The real GDP in the fourth quarter of 2004 had increased by 4.15 per cent over the third quarter of that year. The quarterly performance of the real GDP in the last five years has been a fluctuating one, with eleven quarters showing a decrease in GDP, while nine months showed an increase.
The bad news is in effect that real GDP decreased by just under six per cent in the first quarter of 2005. It is worth noting what has led to this because the data highlights once more the vulnerability of the Maltese economy to international developments. Any O level student of economics knows that one of the three methods of measuring the gross domestic product is by adding consumption expenditure, government expenditure, investment and exports and subtracting imports. The two international trade components are by far the two largest components of GDP given the small size of our economy.
In the first quarter of this year exports accounted for 89.5 per cent of real GDP while imports accounted for 108.1 per cent. The difference between exports and imports during this quarter (-18.6 per cent) was the highest registered in the last twenty quarters.
Although the level registered in terms of exports as a percentage of GDP is high (and this denotes the vulnerability of our economy to international developments), exports did take a knock in the first quarter of this year and this knock has very clearly contributed to the fall in the GDP, especially since the other components of the GDP registered positive developments.
This does not necessarily mean that when exports reach a level close to that of imports, we necessarily experience an increase in GDP, as there could be any of the other three components that would drag GDP downwards. This is what happened, for example, during 2002, when real GDP was dragged down not so much by lower exports but by lower investments. However, one still has to appreciate that investments are also strongly linked to exporting opportunities.
Another noteworthy development is the contribution of government expenditure to the gross domestic product. In absolute real terms it has been at its lowest during the first quarter of 2005 since the first quarter of 2002, that is three years ago. Government expenditure represented 20.7 per cent of the gross domestic product.
In some of the more developed countries this percentage is even higher. Obviously the higher the level of government expenditure, the more positive is the impact on the GDP. However, there is consensus in this country that this is not the type of economic growth we aspire to have.
A component of GDP growth that is equally significant is private consumption expenditure. In real terms seasonally adjusted consumption expenditure has hovered at the level around the Lm268-Lm272 million for the last 20 quarters. The indication is very evident that this particular component of GDP has reached a plateau.
This development may be judged not to be so positive by the retailing and distribution sector, as they are seeing little growth to their activity. On the other hand, it is judged to be a positive development by those who would like to see a higher level of saving in this country to release resources into investment activities.
Investment is the final component of GDP. It does not take much to understand that the higher the level of investment, the better it is for the economy, not only in the short term because it pushes up GDP but also in the long term, as it spurs further economic activity.
The level it reached in the first quarter of 2005 was significantly high. It was the third highest level reached in the last 20 quarters and it represented 29.7 per cent of real GDP, the highest contribution achieved during the last twenty quarters.
Looking at this data shows how complex our small economy is. Large economies always have the option of stimulating domestic demand to achieve GDP growth. We cannot do this because the impact will always be short lived and the negative consequences on the balance of payments and the fiscal deficit could be dramatic.
We need to achieve a higher level of exports and investment, which in turn would make private consumption expenditure more sustainable which in turn would make government expenditure sustainable. This data confirms (if we ever needed such confirmation) that the primary motors of our economy still remain the exports of goods and services and investment, both of which are very much influenced by the international economy.