14 September 2005

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Economy grows by 2.4 per cent in Q2

But consumer demand falls and business stocks accumulate

James Debono

During the second quarter of 2005, the Maltese economy registered a real growth in its Gross Domestic Product of 2.4 per cent.
But the increase in Malta’s Gross Domestic Product was not accompanied by an increase in consumer demand, which nose-dived in the first two quarters of 2005.
On the other hand there are indications of an increase in the stockpiling of stocks by businesses which can be deduced from a substantial increase in the item called ‘changes in inventories’ which accounts for 7.7 per cent of Malta’s GDP in the first two quarters of 2005.
Positive economic trends in the second quarter, have been interpreted as a sign of an economic turnaround by the government.
In fact economic fortunes have improved when compared to a decrease of 0.1 per cent in the GDP during the first quarter.
Economist Karmenu Farrugia considers the growth in Gross Domestic Product as a positive economic indication but would not go as far as interpreting it as a sign of a general economic turnaround.
“In the same way as two successive quarters are a minimum requirement for conceding to a recession, the same applies for hailing a turnaround,” Farrugia told The Malta Financial and Business Times.
Farrugia augurs the positive economic performance in this year's second quarter will be repeated in the third quarter. According to Farrugia we can only start speaking of an economic turn around if growth is registered in the third quarter of the year.
But Farrugia considers the increase in output in practically every sector of the economy including the manufacturing sector as positive.
“It is satisfying that the manufacturing sector, the economy's Cinderella, did itself show an improvement, albeit only half the overall average.”
But Farrugia expressed his concern on the decline in the Gross National Income.

“Traditionally, our GNI was always appreciably higher than our GDP due to incomes from investments overseas and contributions from emigrants to their families. But today we have reached a stage where GNI is lower than GDP.”
Farrugia attributes this to the unduly high share of foreign owned companies in the Maltese financial sector, “especially since Mid Med Bank was sold.”
Yet Farrugia acknowledges that the banking sector also experienced a substantial growth during the second quarter of the year.

Increase in inventories
Yet during the first two quarters of 2005, 7.7 per cent of Malta’s GDP was composed of the obscure; ‘changes in inventories’ item.
According to the National Office of Statistics this could be an indication of “the stockpiling of stocks by businesses.”
This contrasts with figures in the first two quarters of the previous two years when changes in inventories amounted to less than 0.5 per cent.
One third of the growth registered in the second quarter of 2005 could be attributed to an increase in stocks, which rose from 7 million in the second quarter of 2004 to 22 million this year.
During the first two quarters of 2005, the item “changes in inventories” reached an astronomical Lm70 million figure, the highest ever for the first two quarters of any year since 2003 and even greater than the total for any year since 1999.
This figure exploded in the first quarter of 2005 when it reached the Lm48 million.
There was no explanation on the impact of the substantial increase in inventories in the NSO news release issued last week.
In a press conference on Saturday, the Green Party’s spokesperson for economic affairs Edward Fenech called on the NSO to explain the impact of these economic movements.
“Unfortunately, due to lack of detail in the NSO publication, it is not possible to determine what contributed to an extraordinary change in inventories of Lm70 million over the first six months of this year. It is important that in the future the NSO details such movements”, Fenech said.
Contacted by The Malta Financial and Business Times, Robert Mizzi, Manager Information Services of the National Office of statistics “the term changes in inventories is defined as the value of entries into inventories less the value of withdrawals and the value of any recurrent losses of goods held in inventories.”
According to Mizzi inventories consist of materials and supplies; work-in-progress; finished goods and goods for resale.
Asked to state the reason why this item has shot up from much more modest figures in previous years, Mizzi told The Malta Financial and Business Times that this “increase may be an indication of an overall higher stockpiling by the business community.”
Economist Karmenu Farrugia contends that “increased inventories are not necessarily positive if taking place in exporting sectors as they may reflect unsold finished goods.”
According to Farrugia figures showing a serious decline in exports published by the NSO on Monday may well point to this potential phenomenon.

Negative indication
In normal circumstances changes in inventories are the smallest component of the GDP, usually less than 1% of GDP.
Large changes in inventories signal changes in aggregate demand and, thus, are indicators of future economic activity.
An excessive increase in inventories may signal that aggregate demand is slowing down and that firms will soon cut back production and output in face of such a fall in the demand for goods and services.
Economist Jay Kaplan writing in the book ‘Principles of Macro Economics’ states that:
“If the economy is slowing down, possibly entering a recession, the bearer of the bad news will often be an undesired accumulation of inventories.”
As consumers reduce their purchases, sales of goods and services slow, inventories build up, and firms slash production to reduce unwanted inventories.
In fact comparing the first two quarters of 2005 with the corresponding period in 2004 one finds that while inventories have increased substantially, consumer demand has decreased by Lm 10 million.
When inventories accumulate due to a decrease in consumption, businesses respond by reducing orders of goods from producers.
Economic analysts monitor the divergence of inventories from desired levels as a leading indicator of potential changes in future economic growth rates.
Yet according to Robert Mizzi it is still too early to make conclusions from these figures.
“The NSO monitors the changes in inventories every quarter by means of a small sample survey. But due to technicalities the quarterly results cannot be considered as conclusive. The data will be revised as soon as more reliable annual data becomes available through annual surveys and censuses.”
A positive indication could be that as economic output improved in the second quarter of 2005, inventories also decreased from Lm 48 million to Lm 22 million.
But despite the long-term negative indications associated with a substantial increase in inventories, this figure reflected positively on GDP figures for the first two quarters of 2005.



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