Malta’s economic growth as expressed by the country’s gross domestic product (GDP) is not quite as healthy as is being claimed, according to an in-depth analysis of the way in which GDP data is formulated by the National Statistics Office (NSO), Chamber of Small and Medium Enterprises (GRTU) director general Vince Farrugia charged yesterday.

Last year’s third quarter GDP growth had been officially listed at 4.147 per cent by the NSO, but according to a study released by the GRTU yesterday the figure should have read 1.941 per cent, a 53.19 differential if the Retail Price Index (RPI) had been used for its formulation instead of an unknown deflator. For last year’s second quarter, meanwhile, official growth had at 3.638 per cent and should have instead been 2.256 per cent.

Speaking yesterday, Mr Farrugia commented, “Government must clarify the situation. Malta cannot continue to have a situation where the Chief Officer of NSO is also the independent regulator responsible to the public to ensure the NSO functions correctly.

If methodology is changing, or if unusual circumstances prevail, NSO should clearly explain the situation without the need of GRTU or any other body to raise the alarm.

“The measurement of GDP growth is important for the whole economy and the measurement of household consumption is of interest particularly to a national organisation representing retailers and traders like GRTU. GDP figures are important economic indicators defining Government economic action. These figures cannot continue to be doubtful.”

The issue boils down to the way in which final household consumption is calculated. According to the GRTU, while the RPI showed inflation of 1.28 per cent between the third quarters of 2006 and 2007, the inflation implied by the household final consumption expenditure deflator published in December was quite the opposite and stood at -1.86 per cent. The -1.86 per cent figure used for the deflator, instead of the RPI as prescribed by the GRTU, had the result of perhaps artificially pushing prices upwards by using a negative deflator, while the RPI had been in the positive.

With total final consumption expenditure accounting for 86 per cent of GDP, there is a considerable differential in the calculation of GDP, depending on the methodology used in calculating consumption prices.

Also under scrutiny the way in which the components of GDP – total final consumption expenditure, gross fixed capital formation, and the exports and imports of goods and services – are converted from nominal levels, or market prices, to real levels, or constant prices.

This is done by using a deflator, a measure of the change in prices in the economy.

The NSO, however, makes no mention of the deflator used in carrying out its GDP calculations, and the GRTU yesterday called upon the NSO to publish the deflators it uses, considering the large differential between the uses of the two yardsticks.

The results come from a technical paper commissioned by the GRTU and drawn up by Prof. Joseph Falzon from the University of Malta’s Department of Banking and Finance published yesterday – titled The Real GDP Growth in Third Quarter 2007: A Reconsideration – compares inflation figures from the Retail Price Index for the third quarters of 2006 and 2007, and contrasts them with the inflation implied by the deflator used in an NSO news release for household final consumption expenditure.

The paper then estimates an alternative real final consumption expenditure using inflation from the Retail Price Index, which was found to have increased 3.42 per cent as opposed to the 6.02 per cent increase quoted by the NSO, with the effect that real GDP at constant prices had grown by just 1.94 per cent during last year’s third quarter, and not by 4.14 per cent as stated by the NSO.

Prof. Joseph Falzon also stressed in the paper that the study was not meant to dismiss the NSO’s “very valid work” carried out often under severe pressures, data limitations and time constraints.