Analysis of Global Economic Growth

World economic growth

1.0 INTRODUCTION

1.1 World Economic Outlook:

According to the World Bank, world economic growth accelerated sharply in 2004. In aggregate, the year 2004 has been the healthiest year for developing countries since the last three decades. East Asian countries have come out of the 1997 crisis and are now performing well. The ongoing economic boom in China as well as the surge in activities registered in Japan were major factors in promoting growth in the region. Latin American countries and Sub-Saharan Africa also had a better year. This performance reflects a fortuitous combination of long-term secular trends built on a foundation of better macroeconomic management and an improved domestic investment climate converging with a cyclical recovery of the global economy.

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There were however some lingering imbalances in the global economy associated with the rising twin deficits in the United States, a delayed recovery in Europe, coupled with high and volatile oil prices, and questions about the path of China’s economy that might constitute risks to the pace of growth in developing countries over the medium term.

World’s economic growth is likely to slow down in 2005 with a projected rate of 3.2%. Several factors are likely to contribute to the slower growth. It is believed that the investment cycle in the US has peaked, therefore resulting in a slowdown in growth. Furthermore, world demand has far exceeded world supply, resulting in a substantial increase in oil and other commodity prices, therefore reducing demand in other countries. Also, increases in interest rates are likely to slow the investment growth. The US is likely to finance its large budget deficits through tighter fiscal policies and in Europe countries will tighten their budgetary control to remain within the realm of Maastricht limits.

Table 1: World economic outlook

*projected figures

Source: Global Economic Prospects 2005, World Bank.

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1.2 Mauritian Economic Outlook:

Mauritian economic growth in 2004 was positive and stabilised at 4.2%, slightly lower than the 4.4% recorded in 2003. On the one hand, internal demand constituted an important dragging factor, with a 6.3% growth in consumption expenditure compared to 4.5% in 2003. On the other hand, lingering uncertainties linked to the wave of change in the international economic order, uninterrupted trade liberalisation and the gradual loss of our long-standing preferences had a dampening effect on growth. The recent run-up in oil prices was also a constraining factor on economic buoyancy.

Business confidence appeared to be quite timid in 2004. However, in spite of an overall deceleration in the rate of investment, which grew by 5.5%, compared to 10.0% in 2003, private sector investment grew by a high 13.2% as opposed to a negative 2.2% in 2003. Moreover, international perception about Mauritius remained positive, and foreign investments in hotels and ICT projects were at a relatively high level.

Despite the stable growth rate, several macroeconomic and sectoral performances were relatively unfavourable. Savings rate was lower, registering 23.3% of GDP in 2004 against 25.4% in 2003. Inflation rate was higher in 2004, reaching 5.5%, as opposed to 3.9% in 2003. Overall external trade worsened, from a surplus of Rs. 2 billion in 2003 to a deficit on Rs. 3.9 billion in 2004, as a result of a very large increase in the merchandise trade deficit, from Rs. – 8.4 billion to Rs. – 15.7 billion.

On a sectoral basis, industries were faced with a restricted margin of manoeuvre as a result of increasing international competition from lower-cost producers. Repercussions were felt in the EPZ sector, which registered a negative growth rate of 5% in 2004, following the deceleration of 6% in 2003. The tourism sector, in spite of its apparent dynamism, recorded a growth rate of only 2.6%, compared to 3.0% in 2003. Financial services experienced some inertia, with a low expansion of 1.0%, compared to a high 7.2% in 2004. However, the agricultural sector expanded by 5.1% in 2004, in contrast to the low 1.9% recorded in 2003 and the non-EPZ sector grew by 5.0% in spite of the gradual reduction of tariff protection.

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2.0 ECONOMIC PERFORMANCE FOR 2004

2.1 National Accounts:

Real Gross Domestic Product (GDP) grew by a moderate 4.2% in 2004, compared to 4.4% in 2003. At current basic prices, GDP increased from Rs. 137.9 billion in 2003 to Rs. 151.7 billion.

GDP per capita at current basic prices increased by 10.1%, to attain Rs. 122,984 in 2004. In US dollar terms, GDP per capita reached US$ 4,477, 11.7% higher than the previous year, when it reached US$4,010. It is worth noting also that at Purchasing Power Parity, GDP per capita in dollars was estimated at US$ 11,400 in 2003.

For the second consecutive year, net income from the rest of the world was negative, with Rs. – 415 million in 2004, compared to Rs. – 833 million in 2003.

Table 2: Output at current basic prices:

* GDP at Purchasing Power Parity provides a more reasonable international GDP comparison among nations.Source: CIA Fact Book 2004

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While the EPZ sector continued to register negative growth rates for the third consecutive year, almost all other sectors recorded positive growth rates in 2004.  Non-EPZ grew by +5.0% in 2004, slightly lower than in 2003, when the growth rate was +5.8%. After high growth rates registered in 2002 (+7.6%) and 2003 (+11.1%) mainly due to high investment in building and construction works by the public sector, Construction grew by 3.1% in 2004. The distributive trade sector grew by 3.2%, slightly higher than the 3.1% recorded in the previous year.

Transport and Communications activities expanded by 6.5% in 2004 as opposed to 6.1% in 2003. During the same period real estate, renting and business activities grew by 6.9% compared to 6.5% in 2003.

Education, including services provided by public and private operators grew by 7.2% in 2004, compared to 5.3% in 2003, while health and social work expanded by 8.8% compared to 7.0% in 2003. Electricity, gas and water supply registered a growth of 4.2% as opposed to 4.6% in 2003.

2.2 Consumption

Last year’s economic performance was once again influenced by internal demand. Total final contribution of consumption to GDP at market price was estimated at 77.3%, compared to 75.1% in 2003. Real final consumption expenditure, increased by 6.3% in 2004, compared to a 4.5% rise in 2003. This expansion in the consumption rate, which is much higher than the GDP growth rate, is clearly inflationary and has a negative direct impact on trade balance and budget deficit. It must be noted that private consumption represented 83.1% of total consumption in 2004, as opposed to 82.8% in 2003. A growth of 6.7% was observed in the consumption of households in 2004, against 4.9% in 2003. This is the highest growth rate recorded since 1989. On the other hand, the share of public sector consumption amounted to 16.9% of total consumption in 2004, showing a slight drop from the 17.2% observed in 2003. Public consumption grew by 4.4% compared to an increase of 2.6% in 2003.

In 2004, the continued growth observed in total consumption has been largely sustained by the significant increase in average monthly income earnings of households. The average monthly earnings in large establishments grew by 12.8% between March 2003 and March 2004, to reach Rs. 11, 084. A general upward trend was observed in all industrial groups. The largest increase (+24%) was noted in public administration, following the implementation of the PRB in July 2004.

Table 3: Consumption

2.3 Savings & Investment

Gross national savings, measured by the difference between Gross National Disposable Income and Total Consumption, increased in nominal terms by 1.8% to reach Rs 40.7 billion in 2004 from Rs 40.0 billion in 2003. Consequently, the saving rate, calculated as the ratio of GNS to GDP at market prices, showed a decline from 25.4% in 2003 to 23.3% in 2004. This decline results from an increase in both public and private expenditure.

Table 4: Savings and investment

Investment, measured by the Gross Domestic Fixed Capital Formation (GDFCF), increased to Rs 38.9 billion in 2004 from Rs 35.7 billion in 2003. In real terms, including the purchase of aircrafts and marine vessels, total investment has followed an upward trend of 5.5% in 2004, but lower than the 10.0% growth recorded in 2003. It is interesting to note that net of the purchase of aircrafts and vessels, real investment grew by 8.2% in 2004, representing a better performance than in 2003, when it grew by 7.9%.

Investment rate, measured as the ratio of GDFCF to GDP at market prices, has however gone down by 0.3%, to reach 22.3% in 2004 from 22.6% in 2003.

Private sector investment continued to make up the bulk of GDFCF in 2004. It accounted for 65.6% of total investment in 2004, compared to 61.2% in 2003. This represented a real growth of 13.2% in 2004, after a negative growth rate of -2.2% in 2003. Higher private sector investment was accounted for by new hotels projects, where investment increased by 55.8% in 2004, as opposed to a negative growth of 21.8% in the preceding year. Moreover, there were additional investments in spinning mills and other projects in the EPZ sector, with an increase of 45.0% in 2004 as opposed to a negative 7.7% in 2003.Inversely, the share of public sector investment fell from 38.8% in 2003 to 34.4% in real terms in 2004. In fact, real public sector investment dropped by 6.6% in 2004, after a high 37.0% real growth in 2003, resulting from a record increase of 133.3% in investment in the construction sector in 2003.

The resource gap, given by the difference between savings and investment, was again positive in 2004. However, there has been a significant contraction of 59.7%, from Rs. 4.3 billion in 2003 to reach Rs 1.7 billion in 2004, since investment increased more than savings. The direct consequence of this contraction is a further deterioration of the external account of goods and services.

2.4 Foreign Direct Investment

In 2004, FDI inflow fell by 8.6% to reach Rs 1.79 billion against Rs 1.96 billion in 2003. A sharp contraction was observed in the banking sector, where only Rs. 121 million were invested in 2004, as opposed to a high Rs. 1.3 billion in 2003.

In contrast, higher investments were recorded in the telecommunications sector in the wake of further liberalisation. Similarly, a total of Rs. 1.08 billion were invested in 2004 in other sectors of the economy, including IT, compared to only Rs. 485 million in 2003. The EPZ sector also attracted more FDI in 2004, with Rs. 248 million, compared to Rs. 77 million in 2003. The same upward trend was observed in the tourism sector, from Rs. 103 million in 2003 to Rs. 121 million in 2004.

Table 5: Foreign Investment, Rs million

* Includes receipts from the sales of Mauritius Telecom shares to France Telecom of Rs 7.2 billion

1 Revised Estimates

Concerning outward investment, a high figure of Rs. 1.2 billion was recorded in 2003. However, in 2004, it fell to Rs. 887 million.

2.5  Balance of Payments

The overall balance of payments in 2004, measured as a change in foreign reserve assets excluding valuation changes of the Bank of Mauritius, showed a surplus of Rs. 4.2 billion, compared to a surplus of Rs. 6.2 billion in the preceding year.

In the first three quarters of 2004, the current account recorded a deficit of Rs. 2.3 billion, compared to a surplus of Rs. 1.8 billion in the corresponding period in 2003, reflecting a deterioration in the visible trade account. The balance of trade worsened from a surplus of Rs. 988 million in the first three quarters of 2003 to a deficit of Rs. 3.0 billion in the corresponding period of 2004.

The capital and financial account, inclusive of reserves, recorded a net outflow of Rs. 163 million in the first three quarters of 2004 as opposed to a net outflow of Rs. 1.6 billion in the same period in 2003.

At the end of December 2004, Net International Reserves amounted to Rs. 52.8 billion, 8% higher than in December 2003, when it reached Rs. 48.9 billion. Based on the value of the import bill, exclusive of the purchase of aircrafts and vessels, the level of net international reserves represented 39.6 weeks on imports at the end of December 2004. For the corresponding figure in 2003, it represented 36.6 weeks of imports.

2.6 External Trade

Table 6: External Trade, Rs Billion

* Both Exports and imports are calculated on an f.o.b basis

The overall balance of trade in goods and services marked a significant deterioration in 2004. In fact, there was a shift from a trade surplus of Rs. 2 billion in 2003 to a trade deficit of Rs. 3.9 billion in 2004.

There was a sharp increase in the deficit in visible trade, which worsened by 87.1% in 2004. Trade in goods was largely biased against imports, therefore resulting in a faster growth in imports, which soared by 14.6% compared to a low 3.3% in 2003. Exports however grew at 7.6% in 2004 as opposed a meagre 0.5% in the preceding year.  On the other hand, trade in services fared well, registering a surplus of Rs. 11.8 billion in 2004, representing 13.5% more than in the previous year.

Much of the increase in merchandise imports in 2004 was associated with investment projects, both in the public and private sector. For instance, appreciable increases were noted in the c.i.f value of cement (+57.6%), machinery and transport equipment (+25.9%), crude materials including textile fibres (+46.2%), and telecommunications equipment (+80.3%). Others are linked to an increasing food bill, with surge in the c.i.f value of food items (+14.9%) and of road vehicles (+53.1%).

In fact, it is worth noting that in the fourth quarter of 2004, additional projects and events continued to contribute to boost the import bill. There were also new investment projects in EPZ and in energy production and the significant rise in the international price of petroleum products. Finally, the appreciation of the Rand (+13.2%), the Pound Sterling (+9.1%), the Australian Dollar (+9.2%) and the Euro (+7.1%) also contributed to the escalating visible trade deficit.

Box: 1 – Exports lack dynamics:

Although the Mauritian rupee continued to depreciate against major currencies, including the Euro, exports growth remained relatively static over the past few years. A combination of factors resulted in such a situation. Our markets remained relatively undiversified, with a high concentration in Europe. In the past few years, especially since the advent of the Euro in 2000, the Euro Zone has been relatively less dynamic than other countries like China and the US. Our exports to the most dynamic zones have remained however low. Some of the factors responsible for this lack of dynamism include erosion of our long-standing preferences, rising costs of production and the mismatch of skills on the labour market.

Trade in services on the other hand, recorded a surplus of Rs. 11.8 billion, 13.5% higher than in the previous year. This is in part, due to higher earnings from the travel industry benefiting from the windfall gains of a strong euro and a strong pound sterling. Exports of services surged by 11.4% in 2004, from Rs. 35.7 billion in 2003 to Rs. 39.8 billion in 2004, whereas there was a 10.6% increase in the imports of services during the same period of time, from Rs. 25.3 billion to Rs. 30.0 billion.

2.7 Inflation

Table 7: Inflation Rate, %

The inflation rate, as measured by the percentage change in the yearly average consumer price index reached 4.7% for calendar year 2004 compared to 3.9% in 2003.  This was mainly the result of a combination of domestic and external factors.

There were significant increases in the price of subsidised flour (+17%) and rice (+40%). The rise in the price of flour led to an increase in the price of bread by 12%. The price of other food items, such as chicken (+8.8%), fish (+8.5%) , beef (+9.7%), and frozen mutton (+15.2%)  also went up in 2004.

In addition, the rise in international oil prices had spill over effects on the domestic economy. There were three successive increases in the price of gasoline and diesel oil. The price of gasoline increased by a total of 27.9% and the price of diesel oil rose by 45.0%, therefore causing subsequent surges in electricity tariffs (+5.1%), bus fares (+13.3%), taxi fares (+15.4%) and air fares (+16.0%).

Finally, the prevailing high budget deficit and the sustained level of public investment also contributed to inflationary pressures.

2.8 Employment/ Unemployment

Until 2003, labour force statistics were estimated on the basis of the Population census or Labour Force Sample Survey. A new methodology, named the Continuous Multi Purpose Household Survey  (CMPHS) was introduced in March 2004 to estimate the labour force, employment and unemployment rate. It is based on a sample of households that presently covers a total 8,640 households for the whole of 2004. Estimates are conducted on a quarterly basis, on 2,160 households per quarter.

In the new CMPHS, the lower age cut-off point to estimate the labour force was brought to 15 years instead of 12 years used previously. A few inconsistencies with regard to the results of the survey have been noted, which probably indicate some weaknesses in the new methodology.

The table below gives the estimated figures for the 3 quarters of 2004:

Table 8:

Contrary to what one would logically expect, the CMPHS estimates indicate a downward trend in the labour force over the three quarters. From March to June, there was a fall of 400 people in the labour force. However, a larger fall was observed, with a contraction of 12,900 jobs from June to September

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