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Gross Domestic Product (GDP) grew, in real terms, by 5.2 per cent in the second quarter of 2004, over the corresponding quarter of the previous year. This is a continuation of the growth momentum that began in the second half of 2002.

Although the growth in the second quarter of 2004 was lower than the growth recorded in the corresponding quarter of the previous year, 5.6 per cent, and in the first quarter of 2004, 6.2 per cent the growth in the first half of 2004, at 5.7 per cent, exceeded the first half growth in 2003 at 5.6 per cent.

Based on the first half performance, and taking account of the impact of the drought on Yala agricultural production, as well as the increase in fuel prices on all economic sectors in the second half of the year, GDP growth for the year as a whole is projected in the range of 5.0 - 5.5 per cent.

The reason for the dip in the second quarter was mostly due to the deceleration in factory industry, particularly for the export market, in this quarter and the negative impact of the drought in certain districts that affected the 2003/2004 Maha season agricultural production as well as hydro power generation.

Economic performance in 2002 and 2003 was driven in no small measure, by consumer confidence, also supported by recovery in exports. The cessation of hostilities since February 2002 and the resultant peaceful environment that prevailed in the country paved the way for growth driven by consumer demand. An improvement in investor confidence was first seen during the latter half of 2003. During the first half of 2004, investment expenditure grew, indicating that investment, rather than consumption, would provide the impetus for economic growth in 2004. This was clearly observed in the first half of 2004 as indicated by a sustained expansion in private sector credit and a noticeable increase in imports of investment goods during the period. The prevailing lower interest rates also stimulated investment expansion.

This is heartening, as consumer driven growth is unlikely to be sustainable in the long run without a corresponding rise in investment. The performance in the Colombo Stock Exchange also reflected positive investor sentiment. This increase in investment is reflected in the projected growth for 2004 and, if it continues in the second half of 2004, will augur well towards capacity expansion for achieving a higher growth in 2005 and beyond.

In the sectoral analysis, the Services sector, which has continuously recorded over 6 per cent growth during the last 8 quarters, continued to record the highest growth (7.1 per cent) and contributed 76 per cent to the overall economic growth in the second quarter of 2004. The Agriculture sector, where growth rates have been most volatile over time, grew by 3.3 per cent and contributed 11 per cent to the overall growth. The industry sector, where growth has been less smooth over time in certain sectors, grew by 2.6 per cent and contributed 13 per cent to the overall economic expansion.

Many sub-sectors in the Services sector have expanded steadily and healthily during the past two years.

Port services expanded by 12.8 per cent in comparison to 7.2 per cent growth in the corresponding quarter of the previous year. During the reference period, the Colombo Port including South Asia Gateway Terminal (SAGT) handled a significant volume of 521,710 TEUs, lower only to the record 540,694 TEUs handled in the third quarter of 2003. Capacity expansion and improved efficiency at the Sri Lanka Ports Authority have also contributed to this healthy growth.

The wholesale and retail trade sector, the largest sector in terms of value added, grew by 5.7 per cent.

Despite the drop in domestic agricultural production, the Domestic trade sub sector improved by 4.5 per cent mainly owing to the expansion in the manufacture of other, domestic market oriented, products.

The Banking, Insurance and real estate sector grew by 7.7 per cent compared with an increase of 11 per cent in the corresponding quarter of the previous year.

The Services category, which includes all unclassified services such as private education, health, hotels and restaurants, advertising, private security, janitorial, personal and all other business services, grew by 4.3 per cent against an increase of 4.5 per cent recorded in the same period of 2003. Although drought conditions prevailed in certain districts during the first half of he year, the Agriculture fishing and forestry sector expanded by 3.3 per cent in the second quarter of 2004.

The industry sector grew by 2.6 per cent. The contraction in the Electricity sub sector and just adequate growth in factory industry were mainly responsible for this comparatively low growth. The Manufacturing sector grew by 3 per cent as against an increase of 7.3 per cent during the corresponding period of the previous year. The factory industry sub-sector, which covers large and medium scale enterprises, grew by 3.1 per cent compared with 8.9 in the second quarter of last year.

The Construction sector continued to grow during the second quarter as in the first quarter, but at a higher pace, 7 per cent. The growth was largely due to the increase in housing construction activities and refurbishment and expansion in the hotels sector catering to the anticipated increase in tourist arrivals. The growth in the first half of 2004 reflects the growth momentum that has continued since the second half of 2002.

The increase in investment activities that commenced since the second half of 2003 and continued in the first half of 2004 is one outcome of the macro-economic stability that prevailed since the second half of 2002. If this trend in investment continues, the country could achieve a higher growth in the medium term.

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