The FINANCIAL — According to preliminary statistics from the National Statistics Office of Georgia, real growth of Georgia’s Gross Domestic Product amounted to 2.5% year-over-year in the fourth quarter, with growth in December being -0.8%.
However, investors, businesswomen, and consumers, do not despair! Estimated real GDP growth for the entire year was still a healthy 6.1%, and while we’ve seen a slowdown in economic activity, this is a temporary result of the elections and the related political uncertainty. Georgian economic growth will be back.
For the past years, Georgia has been somewhat of an economic miracle. While growth was subdued in 2008 and 2009, mainly due to the global financial crisis and the August 2008 war, in the other years between 2006 and 2011, growth was between six and twelve percent. These are truly amazing growth rates.
The reason for a slowdown in economic activity was political uncertainty as a result of the elections and the change in power. Let’s review some basic economics: a country’s Gross Domestic Product is composed of its consumption, investment, government spending, and net exports. In a time when there is considerable political uncertainty, people may be compelled to consume less in order to build up a “safety buffer”. In fact, we saw the Consumer Confidence Index, prepared by the International School of Economics at Tbilisi State University, drop sharply in December. This drop was especially pronounced in the expectations subindex, which dropped from 5.2% in November to -6.5% in December.
Investment, and especially foreign investment, also went down, because in times of uncertainty, it is harder to predict what the (economic) future will look like. In fact, in the run up to the elections, Foreign Direct Investment went down during the first three quarter of this year – data for the fourth quarter is not available yet.
Because of the elections we also saw a drop in government spending: in the run up to the elections, we witnessed a strong growth in government spending, while after the elections, the government stopped spending. Especially in the first few months after the elections, a lot of spending was temporarily stopped, because it was not clear what the future policy directions were going to look like. Obviously, expenditures related to organizing the elections also stopped. As a result of all of this, in November, spending dropped by 150 million Lari compared to October.
However, the good news is that the drop in consumer confidence, foreign direct investment, and government spending will be temporary. In fact, we’ve already seen a rebound: consumer confidence measures are back up in January, and 63% of people expect the economy to get better. The drop in FDI will also be temporary: it dropped because investors stopped investing before the elections to see what would happen. This is not because of any inherent weaknesses in the economy, but because it is often much easier to make a rational investment decision after seeing what new policy objectives are set, and what the new landscape looks like, instead of jumping in while things are in flux. As for government spending, we saw strong growth in December compared to November. The output of the banking sector, also a leading indicator, was also up in December, which predicts growth in the future, and external merchandise trade numbers for January are positive year-over-year.
In short: don’t worry. It is normal for the economy to be in flux before and after elections. This doesn’t point to any fundamental weaknesses in the Georgian growth model, but is a result of temporary uncertainty. We’ve seen signs of recovery already, and more will come. Georgia will bring us growth magic again!
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