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Did the economy really grow in 2021?

Jul 03,2021 - Last updated at Jul 03,2021

The Jordan Department of Statistics announced last week that the GDP (in fixed prices) grew in the first quarter of 2021 by 0.3 per cent relative to the first quarter of 2021. Albeit it is a positive rate of growth, it is meager. Furthermore, a quick review of the sources of the growth not only shows a somewhat bleaker view of the economy but also underscores the need for policy makers to go back to the drafting board.

The contributions of several economic sectors to the GDP have declined in the first quarter of 2021. These sectors were: manufacturing, electricity and water, construction, wholesale, retail trade, restaurants and hotels, transport, storage and communication, and social and personal services.  Note that the majority of these relate to production and the real economy, and make up 47 per cent of the GDP. 

On the other hand, the sectors that witnessed growth in the first quarter in 2021 were agriculture, quarrying, finance and insurance, government services, net taxes and calculated service cost. The prominent players among the sectors are government services and taxes which make up 36 per cent of the GDP. Therefore, one should immediately surmise that the private sector is definitely hurting during the period. 

Another problem, which all should be alerted to is that the growth in 2021 is based on a reference year that suffered a significant economic decline. In fact, the growth rate in the first quarter of 2020, just before the closure of the economy, was 1.3 per cent and the year ended at a negative growth rate of 1.6 per cent. In other words, referencing 2020 is problematic in terms of deriving conclusions. Hence, and based on this tiny growth rate, which is the lowest in 20 years (excluding 2020) there is no cause to celebrate yet!

But this is not the whole story! In order to calculate the change in the real income per capita, average share of the GDP of a person living in Jordan, economists deduct the rate of growth in the real GDP from the growth rate of the population, which averaged close to 2.5 per cent in Jordan over the last five years. A quick calculation (2.5 per cent minus 0.3 per cent) shows that the per capita income in Jordan has declined by 2.2 per cent in the first quarter of 2021. 

Fast forward to the recent defence ordinances which were issued by the government last week heralding further easement of restrictions on movement and economic activities, and offering some exemptions on taxes and waivers of some penalties, note that some of these waivers were already in place before the recent ordinances. While such moves are welcome, they are not enough. It is a well-known rule in economics that tax exemptions and tax holidays have a weaker impact on the economy than the alternative fiscal tool of increasing government spending. Hence, the effect on growth of the economic ordinances will be lukewarm. This also means that any growth in the coming months this year and the years that follow will be rooted in, and caused and motivated by the private sector alone, which has already suffered as the recent data show.

The upshot of all this is that the current growth is anemic, and negative in terms of per capita income, and the solutions being offered by the government, even though in an almost correct direction, are feeble!  Everyone knows what is right and what should be done to bring back growth. The focus of all, government and pundits, should be on growth now. Let’s not wait too long!  

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