Kuwaiti non-oil GDP set to keep growing
Recently-released data show that Kuwait’s non-oil economy grew by a subdued 0.9 per cent in 2011 as key sectors continued to feel the fallout from the financial crisis.
Growth in 2011 was affected by falls in output in the trade, manufacturing and finance sectors. The latter was likely affected by continued deleveraging at investment firms, according to a commentary from the National Bank of Kuwait.
Although growth has probably picked up a little since, a faster pace of government project spending and aggressive economic reforms are needed to provide a more permanent boost to growth.
Recently-released data show that Kuwait’s non-oil economy grew by a subdued 0.9 per cent in real terms in 2011 as key sectors continued to feel the fallout from the financial crisis. In addition, growth in earlier years was revised down from previous estimates, which now show that the non-oil economy contracted for three straight years between 2008 and 2010.
"We expect growth to have picked-up somewhat in 2012, thanks partly to strong growth in the consumer sector, and our forecast for non-oil growth of 5 per cent in 2013 remains unchanged," said NBK, "But faster implementation of government capital spending projects and a more aggressive approach to economic reforms are needed to put Kuwait’s economy on a permanently higher growth path."
Real oil sector output jumped by 14.1 per cent in 2011, as Kuwait (and other Gulf OPEC producers) responded to rising oil prices by increasing supplies and sought to offset steep falls in Libyan output. This increase was more or less in line with expectations. However, because of lower-than-expected non-oil output, overall real GDP growth in 2011 came in weaker than the 7.6 per cent we had estimated, at 6.3 per cent.
The sluggish performance of the non-oil economy in 2011 was driven by falls in output in three sectors: trade, manufacturing (including refining) and finance and business services. The fall in the latter, at 7.2 per cent, was especially large and by itself subtracted some 1.9 per cent points from non-oil growth as a whole.
Within this category, the fall in output came almost entirely from ‘financial institutions’, which includes investment companies that continued to deleverage in the wake of the financial crisis. Output in this segment was 53 per cent lower in real terms than its peak in 2007. The bulk of this deleveraging is now likely behind us. As a result, the sector’s negative contribution to non-oil growth should ease going forward.
Elsewhere, there were strong performances from the utilities (+10.9 per cent) and community & personal services (+6.4 per cent) sectors – both of which have close government links. In the latter, for example, public administration & defence, education, health and social security account for 84 per cent of total output. These will have benefitted from the huge 20 per cent rise in public spending on wages & salaries seen in FY 2010/11.
Looked at by expenditure types, the figures broadly confirm the view of an economy driven by oil exports and government spending, while investment spending remains weak. Exports were the fastest growing segment in 2011 – unsurprising, given the policy-driven increase in oil production described above. Similarly, government consumption grew by a very solid 9.7 per cent, again likely reflecting the solid rise in public employment costs seen during the fiscal year.
Gross investment declined by 4.0 per cent. These numbers can be very volatile, and the fall does come after a 19.8 per cent increase seen a year earlier (though this in itself followed a sharp fall the year before). We estimate that the public sector (including oil) typically accounts for around half of all investment in the economy, so the government’s poor record in delivering on major infrastructure projects has hit investment levels hard. Gross investment in 2011 was still seven per cent lower in real terms than at its peak in 2008.
More puzzling is the apparent weakness in private sector consumption, which rose by just 2.3 per cent in 2011 following a fall of 11 per cent in 2010. The consumer sector has generally been strong in Kuwait over the past few years. Moreover, February 2011 saw the KWD 1,000 Amiri grant awarded to each Kuwaiti, which judged by other metrics seemed to have a significant impact on consumer spending levels. As such, we tend to interpret weak consumption figures more as a reflection of the statistical challenges in measuring consumption, than as a sign that it has provided less support to the economy than previously thought.
In addition to the new 2011 data, there were some major revisions to the GDP data between 2006 and 2010, generally resulting in weaker economic growth than previously thought. Real non-oil growth averaged 1.3 per cent between 2006 and 2010, rather than the 3.8 per cent reported earlier. Of the revisions, by far the largest was to 2010, where rather than growing strongly, GDP is now said to have fallen by 2.4 per cent. The sources of the revision were mostly the utilities, communication, and finance sectors, where output was revised down by a combined KWD 2.3 billion. Parallel revisions on the expenditure side came from weaker private consumption and net exports.