The evolution of the GDP

A few weeks ago, I had assessed the structure of the gross domestic product and attempted to provide the type of GDP structure that could provide maximum economic growth for the country. This week's contribution shall again focus on the gross domestic product for 2004 and seek to establish some trends on the way it is evolving and attempt to draw some conclusions from them.

The first aspect is GDP per head. Total GDP in real terms (that is after accounting for inflation fluctuated between 2000 and 2004). It fell in 2001, rose in 2002, fell gain in 2003 when compared to 2002 and rose in 2004 when compared to 2004.

GDP per head in nominal terms rose every year between 2000 and 2004. However, when one applies the deflator used to compute total GDP, to GDP per head, the picture changes. Following a peak reached in 2000 of Lm4,278, it now stands at Lm4,163, less than one per cent higher than it was in 2003, supporting the claim that in the last five years the economy has grown little.

Another interesting aspect is the percentage of the gross domestic product represented by the compensation of employed persons. It is significant to note that during the years when compensation to employees as a percentage of GDP was highest, that is in 2001 and 2003, we had negative growth.

This does not mean that for the country to achieve economic growth we must depress wages. However, it does mean that, unless employers/producers generate profits from their business, there is no reason for them to grow that business. This in turn leads to a lower GDP and eventually to lower wages.

Healthy GDP growth requires a healthy level of profits. An important component of the gross domestic product is the gross value added, a figure that should reflect the value of the resources locally used (in our case it is nearly exclusively the human resources given that we have no other natural resource) in the production of the national income.

There seems to be no correlation between the level of gross value added as a percentage of GDP and economic growth as, during the two years of negative real growth (2001 and 2003), this percentage was higher than during the years of positive growth. It was 87.6 per cent in 2001 and 2003, while it stood at 86.6 per cent in 2002 and 86.2 per cent in 2004.

The NSO data also allows for an assessment as to which sectors of the economy are performing best.

This can be done either by looking at the net value added (that is the gross value added less depreciation) or by looking at the operating surplus. In the whole of the economy, net value added increased by 1.7 per cent.

Looking at individual sectors, net value added decreased in the manufacturing sector, the utilities sector (that is the electricity, gas and water supply sector), and the hotels and restaurants sector. It increased in all the other sectors, more so in the financial sector, where the increase was of 19.9 per cent.

In terms of operating surplus, in 2004 this remained very much at the same level as that achieved in 2003, after a hefty increase of 6.5 per cent in that year when compared to 2002. In effect it has still to reach the 2000 levels. The sectors that registered an increase in operating surplus in 2004 were the real estate sector, the financial sector, the wholesale and retail trade sector, the manufacturing sector, the quarrying sector and the fisheries sector. Again the best performer was by far the financial sector with an increase of 46.3 per cent in its operating surplus.

A corollary to this analysis is the dependence of the Maltese economy on any one particular sector. The manufacturing sector still plays a very important role in the economy. It represents 32.8 per cent of measured total output; 19.8 per cent of total net value added; 19 per cent of the total compensation given to employees; and 23 per cent of the registered total operating surplus.

Another important sector is the wholesale and retail sector. It produces a lower net value added than the manufacturing sector, but the level of operating surplus is higher.

A study of the way the gross domestic product is evolving is always interesting. However this should not be viewed as an academic exercise. It should assist policy makers to identify what is driving the economy and the impact that the performance of each sector has on the economy as a whole.