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Statistical trends vs. economic expectations
Iurie Gotisan, July 17, 2007

I have recently read several articles about data on economic growth and inflation, in particular, concerning the correctness of these figures. As a sentence cannot synthesise an economic book, I will also try to explain these indicators, especially the inflation rate.

There are many opinions saying that the economy is developing very well, the industry is recovering and becomes more competitive, the inflation is very low and budgetary collections exceed the plan. Probably, I would award victory to them, if I lived in another country. But we speak about Moldova, which I think has a long route to cover in order to become a sample of economic miracle. The economic growth has exceeded the expectations and it is higher than 7 percent after the 1st quarter (but we do not beat any record: the Baltic States, Armenia or Georgia have reported higher rise paces).

Constructions and private consumption have achieved the highest growths. Both of them are volatile components of the growth, which particularly depend on a speculative boom on real estate market, respectively on available revenue (current or probably forecasted). Did one expect this economic growth forecasted for the seventh year in a row to be observed in living standards, too? Unfortunately, it is not so.

As regards inflation, I am afraid to comment it because it seems to be in divorce with reality at a bigger extend than all macroeconomic variables. I reproach the Consumer Price Indicator (CPI) for not taking into account the price of residences, not making a difference between large social groups, regions, while the share as a simple average of some seasonal expense induces lower inflationist expectations. I reproach the growth of inflation rate by 3.9 percent only for the 1st quarter, which I regard as indicative anyway, for not correlating with exceeded economic growth stimulated by consumption. I warn those who rely on this figure that they under-index salaries and reduce the purchase power this way.

As regards the consumer basket, we may affirm that it "cheats the inflation rate" (without interpreting ad literam), if speaking about its structure which seems to be faulty and incomplete. Its structure indicates an underrating of inflation – the share of bakery products, for example, is almost equal with the share of costs of public services, the housing taxes (rent) are underbalanced, while education expenditures (school taxes, admission tuitions, etc.) are absent, and the rural inflation is not taken into account and many other methodological aspects may be raised.

Moldovans consume twofold more foods (as share in the consumer basket) than other Europeans because they are poor. The poorer you are the more foods you consume as share in the total – because the need of food is a priority and you do not have money for everything else. Nor the lots of goods purchased from various markets is a sign of welfare, but they rather indicate the administration of own poverty. In addition, I think that weighing the execution of inflation target on one hand and growth of foreign deficits (trade and current account) on the other hand is far from a right interpretation. It seems to me that the appreciation of exchange rate is the central element that explains a low inflation rate. For example, the leu has grown by about 7 percent compared with the dollar from January to early July. The best argument is a simple analysis, which shows that a 5-percent rise of the leu would reduce the inflation by more than 1 percent. In other terms, if the leu has grown by 7 percent this year, it reduced the inflation by about 2 percent, so that it should be 6 percent for the first half of this year, not 3.9 percent as shown by statistics, and the annual rate should be approximately 13 percent.

The leu is not afraid of the drought. Nor it is afraid of a boom of foreign deficit. The recent rapid appreciation of the leu makes an impression that the national currency does not take into account what happens with the real economy. But let’s recognise that the appreciation of exchange rate cheapens the imports, deepening the foreign deficit this way. The advance of internal demand is linked in turn with appreciation of exchange rate for two reasons. Firstly, the growth of supply (due to cheaper imports) raises the demand to a new level. Secondly, incomes of population calculated in currency are on the rise due to appreciation of exchange rate, facilitating the access to credits.

However, these trends will influence the inflation sooner or later, as the pressure of an explosive consumption finally affects the prices in real economy via incomes, salaries and costs. The forecasted inflation and foreign deficits (of current account, trade) will be unlikely reached in 2007 like in 2005 and 2006.






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