ISET

After few months of strong GDP growth (November 2013-March 2014) a sharp decline in growth rate to only 2.7% (y-o-y) comes as an unwelcome surprise. According to the national statistic’s office, the VAT payers’ turnover is down and electricity demand has declined compared to April of last year.
Is this the reason for concern? Perhaps not just yet.

The GDP growth figures may be somewhat misleading, since they compare the level of GDP in this month to the level of GDP in the same month a year ago. Thus, if we observed an unusually high growth in one month last year, this year we might see significant decline. The slowdown in Georgia’s GDP growth this April seems to fit the pattern described above: High GDP growth in April of last year, but otherwise no dramatic changes in the economy.

Consider that April 2013 was a particularly good month for the country’s GDP. The pick-up in growth was mainly due to high seasonal activity in agriculture, in particular the Ministry of Agriculture’s (MoA) plowing and voucher program (see ISET Economist Blog by Juan Echanove). According to the MoA data, by May 2013, area of cultivated land in Georgia increased by 100% compared to the same period in 2012, and was at the highest level since 2005 the one-time programs provided a temporary boost to the economy, after which the country’s GDP reverted to the trend. Provided the normal trend continued afterwards, one would expect to see a drop in the year-on-year growth in April 2014. In fact, this is what we are observing in the data right now. Download the full report

The frenzied seasonal agricultural activities – purchases of plants, seeds, fertilizers, investment in food processing, as well as the upcoming elections, invigorated real economic activity in March 2014. According to the GeoStat primary estimates, in this month the y-o-y real economic growth reached 8.3%. As a result, primary growth rate for the first quarter of 2014 increased to 7.4 %.

As encouraging as the figures look, the important question is whether growth is driven by the increased business activity or an increase in private household consumption? Unfortunately, at this point there is no solid evidence on which one could base an answer to this question. The data on the breakdown of GDP by categories on a monthly basis is simply not available. We have reasons to believe, however, that March growth is driven at least in part by higher consumer spending, and in that sense may be short-lived. The business activity has picked up as well, but the relative importance of these two growth components in GDP is yet to be ascertained. Download the full report

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