Economy contracts after 4 quarters of growth

• 3Q suffers 1.5% negative growth largely influenced by 41-day quarantine curfew
• Agriculture manages 1.7% growth, but industry and services shrink by 2.1%, 1.6%

The country’s economy between July and September has suffered its first contraction in five quarters, the latest data revealed yesterday.

The Department of Census and Statistics (DCS) yesterday announced that the economy shrank by 1.5% in the third quarter as against a 1.5% growth a year ago. The economy managed to grow year-on-year in the preceding four quarters, starting from the third quarter of 2020. (see chart).

Agricultural activities (accounting for 8.7% of GDP) recorded a slight positive growth of 1.7%. DCS said this sector was positively affected by the fact that the Government had allowed agricultural activities to continue throughout the country even under quarantine curfew. Industry (accounting for 29.9% of GDP) and services-related activities (57.4% of the economy) recorded negative growth rates of 2.1% and 1.6% respectively during the relevant quarter. In the same quarter of last year, these activities recorded positive growth rates. The ‘taxless subsidies on products’ accounted for 4.1% of GDP in the third quarter of 2021.

In 2020, largely owing to the COVID pandemic, the economy suffered a historic contraction of 3.6% in comparison to 2.3% growth in 2019 – which came despite the Easter Sunday setback.

The GDP at constant prices in 3Q decreased to Rs. 2,497,489 million from Rs. 2,536,490 million a year ago. At current prices, GDP rose by 1.1% to Rs. 4,132,955 million in 3Q from Rs. 4,087,148 million a year ago.

DCS said the third wave of the COVID-19 pandemic, which began in late April 2021, had intensified and peaked by August. The impact of the third wave intensified with a higher increase in the number of COVID-19 infected patients in every district. Infected patients with the new Delta strain were reported to exceed the hospital capacity, with an increase in the number of deaths. This situation again had a negative impact on the expanding economic activities under the ‘new normal’ situation.

It said that due to the spread of the pandemic throughout the country, the Government imposed a quarantine curfew from midnight of 20 August, to control its spread. The quarantine curfew was periodically extended and lasted for 41 days until 1 October.

DCS said the Government had allowed agricultural activities, many manufacturing industries, construction and selected services to continue even during the quarantine curfew period with the objectives of maintaining the essential commodity supply chain, protecting foreign exchange inflow and ensuring household income. However, those economic activities were hampered by the pandemic and the quarantine curfew. It was observed that the majority of the people exercised self-restraint to escape the danger of the pandemic. During this period there was a clear decline in economic activities, especially in the wholesale and retail trade, manufacturing industry, construction industry, transportation, accommodation and food serving, and providing of private services.

At the same time, increased input prices of producers due to import restrictions imposed as a solution for declining foreign currency reserves also contributed to the slowdown in economic activity. Under this situation, many economic activities reported negative growth rates in the third quarter of 2021 compared with the same quarter of the previous year.

After the first wave of the COVID-19 pandemic in 2020 was well controlled by the Government, business was carried out under the new normal situation as usual. At the same time the lifestyles of the people were restored.

DCS gave the following key highlights of the sectoral performance of GDP.

Agricultural activities: The overall agricultural activities recorded a slower growth of 1.7% in the third quarter of 2021, compared to the higher growth of 3.1% recorded in the same quarter of 2020. This slow growth in agricultural activities was particularly reflected in ‘Growing of cereals’ (38%), ‘Plant propagation and agriculture supporting activities’ (13.6%), ‘Animal production’ (8.9%), ‘Growing of oleaginous fruits including coconut,’ (8.8%), ‘Forestry and logging’ (7.9%), ‘Growing of fruits’ (6.4%), ‘Growing of spices crops’ (3.6%), and ‘Growing of tea’ (2.8%). However, ‘Marine fishing’ (10%), ‘Growing of vegetables’ (9.8%), ‘Growing of rubber’ (8.1%) and ‘Freshwater fishing’ (5.2%) declined significantly during the quarter. And ‘Growing of rice’ (1%) has also reported a slight decline.

Industrial activities: Overall industrial activities recorded a negative growth of 2.1% in the third quarter of 2021. This negative growth was mainly due to the contractions recorded in some manufacturing activities, construction and mining and quarrying industries.

Overall manufacturing industry contracted by 0.6% in the third quarter of 2021 compared to the third quarter of the previous year. This negative growth supported by the contractions recorded in ‘Manufacturing of furniture products’ (20.4%), ‘Manufacturing of basic metal and fabricated metal product’ (10.9%), ‘Manufacturing of chemical products’ (6.3%), and ‘Manufacturing of coke and refined petroleum products’ (6.2%), ‘Other manufacturing’ (1.4%), recorded negative growth rates in the third quarter of 2021. This contraction is mainly due to the negative growth of 2.8% recorded for ‘Manufacturing of Food, Beverage and Tobacco products,’ which is the largest contributor to the total GDP (6.8%) in the manufacturing industry.

However, some of the manufacturing activities recorded positive growth rates in the third quarter of 2021, such as ‘Manufacturing of wood and wood products’ (8.9%), ‘Manufacturing of rubber and plastic products’ (7.6%), ‘Manufacturing of paper products, printing and reproduction of media products’ (7.1%), ‘Manufacturing of machinery and equipment’ (6.7%) and ‘Manufacturing of textiles, wearing apparel, leather and related products’ (4.9%).

The ‘construction’ industry, which contributes 6.7% to GDP, recorded a significant negative growth of 6% during the quarter. With the downturn in the construction industry, the ‘Mining and quarrying’ industry also recorded negative growth of 6.9% in the third quarter of this year. However, other industrial activities of ‘Electricity generation, transmission and distribution’ (1.8%) and ‘Water collection, treatment and supply’ (7.3%) recorded positive growth rates in the relevant period.

Services activities: Overall service sector slumped by 1.6% in the third quarter of 2021. This slowdown in the services sector was mainly due to the disruption in ‘Transportation of goods and passenger service activities’ and ‘other personal services activities’ which equally contributed (9.5%) to GDP. These two industries recorded negative growth rates of 14.9% and 5.7% respectively in this quarter. This significant decline in services activities was mainly due to restricted public gatherings under quarantine curfew. ‘Accommodation and food serving industry’ (19.9%) and ‘Professional services’ (0.9%) also recorded significant negative growth rates in the reference period.

However, in the third quarter of 2021, ‘Telecommunications services’ (18.9%), ‘IT services’ (16.1%), ‘Financial services’ (12.9%) and ‘Human health activities’ (12.3%) recorded positive growth rates compared to the third quarter of 2020.