The BOM should not be taking the dipping unemployment rate as an indicator of stronger economic activity in the economy. The main reason that the unemployment rate has come down is because of the lower activity rate due to demographics
By Rattan Khushiram
The Bank of Mauritius (BOM) seems to be the only one among the different agencies (IMF, Statistics Mauritius, MCB group, Fitch Solutions Macro Research…) which is forecasting a 4% growth forecast for the Mauritian economy in 2018. The BOM usually aligns itself with SM’s latest macroeconomic forecasts and usually differs by more or less one percentage point to the latter‘s growth forecast. That’s quite reasonable.
Over quite a number of years, Statistics Mauritius has systematically overestimated real growth in its initial annual forecasts, made in March of every year, and subsequently revised it downwards. But this year it has maintained its initial March forecast of a 3.9% growth rate for 2018 in its latest September forecast.
Why? What were its main assumptions and which ones may no longer hold?
The main assumptions of Statistics Mauritius in favour of a growth rate of 3.9% were based on Manufacturing growing at 0.9%, construction by 9.5% on the basis of timely implementation of major public investment projects such as Metro Express and Côte d’Or Sports Complex scheduled for 2018, Financial and Insurance Activities by around 5.5% and Accommodation and Food Service Activities by 3.6%.
But with the downgrading of global growth forecasts in October 2018 World Economic Outlook, some of these assumptions no longer hold. Some of the visible signs of slowing global GDP by the end of the second semester were aggravated by the impact of American tariffs on global trade leading to concerns about China’s economy. Many emerging economies and Asia’s leading economies and to a lesser extent Mauritius are closely tied by supply chains, meaning that they are affected by the trade war and the slowdown in China.
In addition, both the US Federal Reserve and the European Central Bank are tightening their monetary policies and higher interest rates have drawn capital to America and the Eurozone dampening investment in the emerging markets. The higher interest rates are already having an adverse impact on yields and asset prices. Growth forecasts for both the US and Eurozone have been toned down and especially so in the eurozone’s economic powerhouse, Germany, which has up to now consistently outperformed other economies in the region.
These developments, which were strangely absent this time from the press release of the Monetary Policy Committee (MPC), provide ample reasons for some analysts to revise downwards the export growth of our goods and services and the assumed growth in manufacturing and financial services. There are also enough reasons to lower the construction and the over-ambitious Public Sector Investment Programme forecasts for 2018 due to the absorptive capacity of the economy, the implementation delays and some unexpected ground realities. And taking into account the leakages though the higher expected deficits in the Current Account of the Balance of payments, the 2018 GDP growth rate has to be revised downwards. And similarly the BOM’s forecast, marginally different from that of Statistics Mauritius.
On the issue of unemployment, the BOM should not be taking the dipping unemployment rate as an indicator of stronger economic activity in the economy. The main reason that the unemployment rate has come down is because of the lower activity rate due to demographics – the ageing workforce and more people going into retirement. We should be comparing employment growth rates over time rather than unemployment rates. The average employment growth for the period 2015-17 is only 0.6% compared to 1.0 % over period 2012-2014. In terms of absolute numbers, over the period 2015-2017, an annual average of 4,730 jobs were being created compared to an annual average of 8,330 over the previous period. Thus there is still a lot to be done to improve employment growth.
As regards the gradually increasing household consumption rates being necessarily an indicator of improving household future prospects or incomes, it is too simplistic a reading given the complexities of the consumption patterns for example of the well-educated, the less-skilled, or of an ageing population. Moreover the new theories relating to the relationship between saving propensities and growth prospects, especially in the context of Thomas Picketty’s magnum opus ‘Capital in the Twenty-First Century’ have given rise to still more intricate arguments on savings rates and growth. It is advisable to avoid such statements which may not be in conformity with recent advances in economic theory and changes to actual practice that reflect both the ongoing demographic shifts and technological progress.
* Published in print edition on 16 November 2018
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