CAIRO: Egypt's real GDP contracted by 1.7 percent in the second quarter of fiscal year 2010/11 compared to the previous quarter, while growing 6 percent from the same period last year, according to figures released by the Ministry of Economic Development. Real GDP grew 5.6 percent year-on-year in the first half of fiscal year 2010/11, compared to 4.8 percent in the first half of fiscal year 2009/10. Meanwhile, it rose 5.5 percent annually in 2010, up from 4.7 percent in 2009. According to investment bank CI Capital, the drop in second quarter real GDP growth was driven mainly by a 6 percent decrease in private spending quarter-on-quarter, which at 70 percent represents the bulk of GDP contribution. Government spending also fell 7 percent from the last quarter. Beltone Financial, on the other hand, described the quarterly contraction as normal and a trend that has been constant over the years. “The second quarter of the fiscal year (September-December) usually witnesses a contraction or a slowdown in both nominal and real GDP,” Beltone said in an emailed statement. “From previous trends, we can conclude that quarter one and quarter four of the fiscal year usually witness the highest quarterly growth rates, while the quarters two and three…record the slowest quarterly growth rates. Therefore, the quarterly contraction in quarter two of fiscal year 2010/11 is not alarming.” According to Beltone, the negative performance may add downward pressure on the annual growth for the current fiscal year, compounded by recent political events in Egypt that will lead to a slowdown. “The political events in Egypt began during the third quarter of fiscal 2010/11 and their impact will extend to the fourth quarter,” the statement said. “We therefore expect that private consumption, investment and exports that have been hit the hardest, as a result of the political and economic uncertainty, production halts and transportation disruption, will lead to a quarterly contraction in real and nominal GDP in quarter three of fiscal year 2010/11,” Beltone added. Magda Kandil, director of research at the Egyptian Center for Economic Studies, expects the third quarter to register negative growth, citing concern that negative growth forced on the second quarter may be an attempt to hide the extent of contraction in the third quarter. Forecasting growth for the whole year, CI Capital expects 2.3 percent year-on-year GDP growth for 2011 while Beltone expect real GDP growth to fall to 3.5 percent year-on-year, in line with government's estimates of 3.5-4 percent growth. “I expect growth to be positive in the fourth quarter. Hence, I expect growth for the year to range between 2.8 and 3.5 percent, depending on the strength of growth in the last quarter Kandil said. The economy's forecasted negative performance this year has raised concerns regarding a wider budget deficit for the government, a deficit which the previous regime was planning on decreasing. CI Capital expects the fiscal deficit to expand to 9.2 percent in 2011. Kandil said that there is an immediate need for fiscal consolidation to reduce the adverse effects on private activity. “Stimulus should be focusing on spending that would support private activity and increase the job content of growth and refrain from continued borrowing for welfare spending that would increase the cost of borrowing and inflationary pressures.” she said.
