In last week’s contribution I wrote about the growth in the gross domestic product as a measure of economic growth and how this may hide certain issues in our economy. I referred to the qualitative elements such as the need to have a more just and sustainable economy, and the need for people to be satisfied with their lives.
I had also mentioned that there are more qualitative elements to consider, which is what I will focus on in this week’s contribution.
In 2017 the growth in the gross domestic product was 6.6 per cent in real terms (that is after accounting for inflation) over 2016. The growth since 2011 was of 43.6 per cent. This means that the so-called national cake has most certainly grown in quite significant terms in the last years. The growth in nominal terms (that is before accounting for inflation) was of 62.4 per cent.
Students of economics know that there are three methods of measuring the GDP – the expenditure method, the production method and the income method. Each method gives the same result. The income method explains who were the beneficiaries of this growth.
Between 2011 and 2017, the growth in total compensation of employees was of 60.6 per cent, while the growth in the operating surplus and mixed income (generally known as profits) was of 78.8 per cent. Thus the share of compensation of employees as a percentage of the GDP dropped from 44.4 per cent to 41.1 per cent. The increase in the share of operating surplus rose from 42.9 per cent to 47.2 per cent. For the sake of completeness, one needs to note that the balance to make up the 100 per cent is represented by taxes less subsidies on production and imports.
There is also data on the average gross annual salary for employees which supports this shift. In the last quarter of 2011, the average gross annual salary was €15,016 compared to €17,911 in the last quarter of 2017. This represents a cumulative increase of 19.3 per cent, compared to the cumulative increase of 62.4 per cent in the gross domestic product.
To support this there is also the growth in investment
Certain sectors have experienced a growth in the compensation of employees to a lesser extent than other. For instance, the growth in compensation of employees in the manufacturing sector was of 20 per cent between 2011 and 2017. On the other hand the growth in compensation of employees employed in real estate activities increased by 109.9 per cent – meaning it has more than doubled. One other question worth asking is whether the economy is becoming more dependent on certain sectors, thereby increasing its vulnerability. In 2011 the five main contributors to total value added were the wholesale and retail trade, transportation and storage and accommodation and food service activities sector, the public administration, compulsory social security, education, human health and social work activities sector, the manufacturing sector, the professional, scientific and technical activities, administrative and support services sector, and the arts, recreation and entertainment and the repair of household goods and other services sector. These classifications are provided by the National Statistics Office.
Together these five sectors made up 72.2 per cent of the total values added produced in the economy. In 2017 these five same sectors remained the top contributors to value added and together they made up 75.6 per cent of the total value added produced in the economy. To give a more complete picture one needs to note that the manufacturing sector gave only a minimal contribution to the increase in value added.
Another piece of data that helps us understand better the full picture is the increase in investment (listed as gross fixed capital formation in the statistics). Investment can be split into two – construction and other areas. It is these other areas that should concern us most as they include investment in transport equipment, machinery, cultivated biological products and intellectual property products. These items enhance the potential of our economy.
The increase in investment between 2011 and 2017 was of 93.3 per cent. The increase in investment in buildings, dwellings and structures was of 89.3 per cent while the increase in the other areas was of 97.2 per cent.
This is what the numbers are saying. One may give one’s own interpretation to them. The headline figure remains very interesting indeed because a growth of the economy of 46 per cent over a six-year span is something we should all be proud of. To support this there is also the growth in investment. On the other hand, the numbers also tell us that compensation of employees has not kept the same pace as the economy and growth is fairly restricted in some sectors.
The going is good but we need to make sure that the benefits of this are spread out across the whole economy and that we are taking the necessary steps to keep our economy as diversified as possible to sustain the resilience it has always had.