In its latest economic brief, National Bank of Kuwait (NBK) reports that Kuwait’s GDP rose by 35% to reach KD 23.6 bn (US$ 81 bn) in 2005 following two strong years of 23% pa average growth. Figures just released by the Ministry of Planning came at the top range of our forecast, confirming our assessment of the strength of the economy.
While growth was lead by higher oil prices and production that lifted value added by the oil sector by 60%, non-oil activities also grew by a strong 10.7%, albeit slower than in 2003 and 2004 when growth amounted to 17% and 12.5%, respectively. The share of non-oil activities dipped from 50% to 41% of GDP.
According to NBK, investment income from abroad was KD2.6 billion (11% of GDP), causing GNP to rise by 35.8% to reach KD26 billion (US$ 90 bn). On per a capita basis, GDP reached $34,482 in Kuwait for 2005, compared to $52,896 in Qatar and $12,897 in Saudi Arabia.
Strong spending on fixed investment and private consumption was the primary driver of non-oil activities. Gross capital formation rose by 49% following an increase of 19% and 32% the previous two years. Consumer spending that represents almost half of domestic demand also saw healthy growth of 12.5%, the fastest rate seen since 1996.
In contrast, government consumption expenditures continued to moderate for a third consecutive year, rising by a mere 4.6%. This reflects the fact that the government has been focusing its spending, which has seen double digit growth in the past two fiscal years, on development projects and transfers.
Overall domestic demand rose by 19%, almost double the growth rate seen two years earlier. However, incremental domestic spending was far smaller than the rise in national income, with about 80% of the increase in national income (KD4.9 billion) saved, and aggregate savings amounting to roughly 45% of GNP.
Among the leading non-oil activities dominated by the private sector, the main contributors to growth were financial services followed by transport, storage and communication. Construction and real estate also had good but slower contributions.
The 20% growth recorded by financial institutions followed two spectacular years with growth of 54% and 27% in 2003 and 2004, respectively. This made financial institutions the leading non-oil sector in the economy in terms of contribution to non-oil GDP. At 18.4% of non-oil GDP, financial institutions surpassed even public administration and defense in the last two years. The solid performance of banks and investment companies has raised their importance in the economy, though most of the value added by this sector is from profits, a big part of which is investment related.
Real estate services were second in importance among private sector led activities. However, growth of this sector was a moderate 3.8%, slightly higher than last year's 3.1% growth. Its contribution to non-oil GDP decreased from 15% in 2002 to 11.7% in 2005.
The NBK report states that wholesale and retail trade, whose share of non-oil GDP was slightly lower than real estate, also saw moderate and slowing growth of 4.2% compared to 8.2% and 6.7% registered in the last two years respectively. This comes as a surprise given the near doubling in growth in imports to 26%, given that much of the trade sector's activities are import related. This suggests substantial revisions will be made to this sector's figures.
The fastest growing non-oil activities where transport and storage, with their contribution to GDP rising by 25%, driven in large part by the rise in oil shipments, but also by growth in re-exports and logistics services in Kuwait. Communication ranked second next with an increase of 22% slightly lower than last year’s 25% growth rate. Business services, a much smaller activity, saw growth of 16%.
Construction, which represents nearly 5% of non-oil activities, registered growth of 13% following double digit growth in the previous two years.
In the manufacturing sector, chemicals and chemical products, which include petrochemicals, saw a third year of strong growth at 23.5%, albeit slower than the previous two years. Strong global demand helped lift prices of commodities and related industries in general. Another good performing manufacturing sector was fabricated metals, which tend to be correlated with construction activity.
Significant upward revisions were made to 2003 and 2004 GDP figures lifting growth estimates from 19% to 23% pa in each of the past two years, much in line with our original estimate.
Revisions mainly pertained to private sector activities including financial services, real estate, trade transport, storage and communication, lifting growth estimates for all non-oil activities by roughly 7 percentage points from 10% and 6% to 17% and 12% in 2003 and 2004, respectively. Revisions to consumer and investment spending also raised their growth estimates significantly in both years, in line with our predictions. Consumption spending growth was raised from around 4% to 6% and 8%, respectively. Growth in gross capital formation was raised from 2% and 16% to 19% and 32%. These revisions reflect in part refinements that the MOP is making to the new methodology for national income accounts adopted in 2004.
