Economists, analysts and the majority working in the financial services sector and market practitioners alike, speak regularly and monitor closely GDP, unemployment figures, inflation. Why is so much importance given to economic data for investments? Amongst many others, these key data points are the main drivers of a country’s economic performance.

To start with, a country’s workforce (employment numbers) is a proportion of the country’s population. Generally 18-65 year olds that are eligible to work are considered to make up the work force.

A workforce coupled with a presence of capital resources as well as technical advancements within each sector of an economy make up the GDP of a country. These factors can then be reviewed on a per capita basis to best measure efficiency and productivity of output.

Therefore, economic Output is a product of the above factors. Generally speaking, a proportional increase in all inputs leads to higher economic growth. However developed countries are faced with bouts whereby their respective capital factor of economic output is operating near full capacity. This would leave economic growth to depend on additional labour and/or technological progress, as well as a major key factor of economic sanity and robustness – wage growth.

It is hence why GDP per capita is often an additional tool to measure the progress and efficiency of economic growth. Therefore, any additional labour given an amount of capital resources, benefits the economy up to a point where the utility of additional labour given available capital reduces production efficiency, and the rate of GDP growth per capita.

Developed economies therefore emphasise a great deal on human capital as opposed to preference over and above physical capital so as to ensure that continued innovation through education helps sustain and boost economic growth through technological progress to support the Labour and Capital factors.

This is precisely why wage growth is critical because it not only incentivises the increase in production by human capital but also serves as one of the greatest forms of ammunition in steering an economy – and that is personal consumption.

Fiscal and monetary policies can then be used by governments to intervene in the economy to control investment, capital flows, currency fluctuations, unemployment and inflation.

Inflation is historically inversely related to unemployment. The lower a country’s interest rates are, the more investment arises from borrowing, leading to increased demand, and inflation through higher product prices.

Governments usually then intervene when inflation reaches unsustainable levels and the economy is operating beyond its long term output given available labour and capital resources. Examples come in the form of restrictive monetary and fiscal policies.

Higher, or rather, excessively high, interest rates act as a lid on inflation, reduce investment and increase saving by consumers. Capital inflows would in fact occur as higher interest rates attract foreign demand for the country’s currency given the higher savings rate.

Monetary policy is then often used to curb excess appreciation of a nation’s currency, which would ultimately make it uncompetitive vs foreign peers, especially for a country’s reliance on exports.

Developing economies, notably emerging markets, inevitably benefit from higher GDP growth rates. Their capital resources would be much lower than their developed economy peers and hence have much upside to gain, when increasing capital investment, adopting technological innovations and promoting participation of the work force.

Disclaimer: This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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