How can Jordan reduce the Output Gap?

Jordan Times

06-03-2025

The output gap is a critical economic concept used to assess economic performance by comparing actual output to potential output. The gap arises when actual GDP (Gross Domestic Product) deviates from potential GDP—the level at which the economy is in equilibrium without inflationary or deflationary pressures. When actual output is below potential output, it indicates economic stagnation, higher unemployment, and relatively low inflation. Conversely, if actual output exceeds potential output, it can lead to significant reductions in unemployment but may also drive inflation due to excess demand, resulting in demand-pull inflation.
Theoretically, there is a direct relationship between the output gap, inflation, and unemployment. When actual GDP is below potential GDP, it signals underutilized production resources and labor (leading to higher unemployment and lower job opportunities), which in turn slows economic activity and lowers inflation. On the other hand, when actual GDP exceeds potential GDP, the increased demand for labor and resources pushes wages and costs higher, resulting in inflation and lower unemployment. This dynamic aligns with the Phillips Curve, which suggests that reduced unemployment typically causes higher inflation in the short term. However, this relationship is not always stable and depends on the nature of the economy; for example, stagflation (a combination of high inflation and high unemployment) can occur when there are external shocks, such as rising production costs.
Regarding Jordan's economic performance and output gap, official data shows that Jordan's real GDP grew by 2.4% in Q2 2024 compared to the same period the previous year. Inflation was 2.3% in January 2025. To determine whether Jordan's economy is experiencing an output gap, it is essential to compare actual GDP with potential GDP.
To measure the output gap in Jordan, various methods are typically employed, such as analyzing long-term trends in GDP or using production functions that take into account labor, capital, technology, and other production factors. In Jordan, there are no officially published estimates of the output gap. However, considering the low growth rates, low inflation, and high unemployment (the unemployment rate for Q3 2024 was 21.5%), it can be inferred that the economy is not operating near its potential, suggesting a significant output gap.
Several key factors contribute to the output gap in Jordan, with the high unemployment rate being particularly notable in recent years, pointing to an excess supply in the labor market. Monetary and fiscal policies also play an essential role, as the central bank focuses on price stability and controlling inflation, which mitigates the impact of the output gap on prices. Additionally, regional and global conditions influence investment and trade, affecting domestic demand and economic growth.
The variation in growth, inflation, and unemployment rates in Jordan suggests the presence of an output gap between actual and potential GDP, which may lead to economic imbalances. To ensure long-term economic stability, it is crucial to boost productivity in Jordan by improving the business environment, providing incentives for key productive sectors, and increasing labor market flexibility through skill development and training programs aimed at reducing structural unemployment. Controlling inflation through balanced monetary policies is also vital for maintaining price stability without negatively impacting growth. Regular monitoring of the output gap using advanced analytical models is necessary. Improving productivity and enhancing the business environment remain fundamental for achieving sustainable growth and long-term economic stability.
Reducing the output gap in Jordan requires long-term strategies that focus on innovation and improving the efficiency of key sectors, such as pharmaceuticals, food processing, mining, agriculture, and other critical sectors identified in the Economic Modernization Vision. These measures can increase productivity, create new job opportunities, reduce unemployment, and support sustainable economic growth. Strengthening public-private partnerships, investing in infrastructure, and enhancing education and vocational training will also help boost actual output levels. Achieving economic stability and attracting foreign investment will further support growth and reduce the impact of economic fluctuations, as demonstrated by the experiences of countries like Singapore, which successfully implemented digital transformation, supported start-ups, and developed vocational education to enhance productivity and competitiveness.