A bumpy ride in 2009?

Juggling between statistics, predictions and a few assumptions, The Sunday Times gazes through the crystal ball for 2009.

This is the year of the Ox according to Chinese tradition. And believers can not only expect babies born in 2009 to take on the animal's traits, but also the financial markets. Investor confidence is at its lowest ebb and economic recovery will probably be nowhere in sight over the next 12 months. A bullish market is, for all intents and purposes, a pipe dream for 2009.

The global economy is expected to slow down dramatically and the Economist Intelligence Unit is predicting zero growth for the eurozone. Malta is unlikely to be spared by the downturn.

Barely a month after a budget speech in which Finance Minister Tonio Fenech predicted economic growth at 2.4 per cent for 2009, the prospects were dampened by Central Bank Governor Michael Bonello.

Speaking at the annual dinner of the Institute of Financial Services at the beginning of last month, Mr Bonello said the Central Bank had revised its growth projections downwards to under two per cent.

Recession

"It would be naïve, indeed dangerous, to expect that the turmoil abroad will leave the Maltese economy and its financial system unscathed," Mr Bonello warned.

He outlined a scenario that had already started to unfold during the last quarter of 2008.

As the recession grips our major markets, Maltese exporters will be increasingly affected, Mr Bonello said. Indeed, firms in the automotive sector have already been hit, while the bleak outlook for the UK economy in particular is likely to have a negative impact on tourism. As the export sector comes under pressure, this will have an adverse effect on domestic demand, the governor added.

In its analysis of the prospects for the UK economy, the EIU has put GDP for 2009 in negative territory. The UK's highly-indebted consumers will have no option but to tighten spending as they seek to rebuild their savings, the EIU reported.

Similar negative prospects were highlighted for Italy and France, with Germany fairing slightly better at a measly 0.2 per cent growth.

With such predictions for key export markets to the Maltese economy, it is obvious that 2009 will be a rough ride for the economy, jobs and consumer confidence.

Manufacturing will increasingly feel the pinch as consumers abroad will restrict spending, hence lowering demand. Tourism will also suffer as consumers will increasingly seek to cut non-essential expenditure. Some observers are envisaging double digit declines in tourism figures compared with the record number of arrivals in 2008. With weakening sterling and recession, the all-important British tourism market could well take a tumble, as will the thousands of tourist providers in Malta.

The persistent strength of the euro against the dollar will continue to dent the competitiveness of companies that trade in dollars, such as ST Microelectronics, which had already sounded alarm bells in the first half of 2008.

Cash flow

Although the government's finances may not have a direct bearing on the economy, a miscalculated deficit for 2008 will have repercussions on the cash flow of private companies owed money by the State.

Last November, the Finance Minister projected a deficit of €200 million for 2008, which was already a far cry from the €64 million target set a year earlier. But the latest National Statistics Office data for November put the deficit at €271 million. Unless the government finds some magic formula to increase its revenue by the year's end by a whopping €71 million, it is highly likely that the deficit target for 2008 will be missed.

We could expect more delays in state payments to suppliers. The government's accounting system does not register expenditure until it is actually paid out, so postponing payments to the new year would enable the finance ministry to reach its targets.

The opposition has called this juggling of numbers creative accounting. The result has left at least one group of importers fuming. Pharmaceutical importers have millions of euros in arrears and they have threatened to stop supplying the national health service with medicines. They will probably not follow up that threat with action but it will leave them cash-strapped, further straining the cash flow in the country.

Unemployment, although still lower than the previous year, saw, for the first time in November, the figures jump up on the back of lay-offs in the manufacturing sector. Although the job market remains buoyant, with the financial services sector enjoying a positive bounce after escaping financial turmoil, 2009 could see a heavier workload at ETC as the global recession deepens.

Confidence and trust

But it is not just raw figures and economic data that will determine how things will shape up in the months ahead. The problem is also one of confidence and trust.

Confidence started to wane in the last quarter of 2008 as some major companies started cutting down on the working week for employees or laying off staff, and negative news from abroad filled the airwaves and reams of newsprint.

However, consumer confidence took another battering when the government decided to scrap the surcharge mechanism and introduce higher water and electricity tariffs last October. The prolonged uncertainty over the rates and the backdating of bills with the new tariffs to October first added to the widespread negative feeling.

With consumers expected to pay water and electricity bills at tariffs higher than the 95 per cent surcharge throughout 2009, confidence is unlikely to improve. The reprieve will come in the form of lower fuel bills for car drivers as the falling price of oil should make travel cheaper. People with a home-loan will also find it cheaper to finance their bank commitment as the European Central Bank continues to cut interest rates.

Overall inflation will also be contained even though Malta has not yet experienced the drop witnessed in other euro zone economies. The performance of the economy and its impact on the public's mood will most probably have political implications as the country votes, for the second time since EU membership, to elect its European Parliament representatives.

Election test

The election will be Joseph Muscat's first test as leader of the Labour Party. The test will be twofold: his impact on the electorate at large and his control over the party.

Dr Muscat will have to prove that his way of doing politics can obtain a majority for Labour. But he will also have to prove that he can have solid internal party consensus over his increasingly pro-European outlook.

Labour could very well repeat the 2004 result of electing three MEPs, more so if the Nationalist Party persists with the Joe Saliba doctrine of injecting less energy in electoral appointments other than the general election.

On the Nationalist Party side, it will be Paul Borg Olivier's first chance to distance himself from Mr Saliba's ways. However, with the odds of winning being slim, it would probably suit him better to stick to the tried and tested philosophy of winning the most important of electoral test - the general election - and ignoring the rest.

The June election will also be a first for Arnold Cassola as leader of the Green Party. Alternattiva Demokratika is unlikely to repeat the immense success of 2004, when Prof. Cassola obtained almost 10 per cent on the first count and only missed being elected by a whisker.

It has to be seen whether a changing Labour Party will draw towards it those pale-blue voters yearning for change and who have, until now, either stayed at home or voted AD.

One other issue that will condition the public agenda for the first half of the year is the end of bird trapping. The transition period negotiated with the EU to permit bird trapping came to an end on December 31. The hunting lobby has already signalled that it intends pursuing the matter further.

With the Labour Party unlikely to play ball with the hunting lobby so as not to distract voters attracted to Dr Muscat's moderate credentials, the hunters will be left to their own devices.

Chinese year of the Ox

Chinese tradition has it that people born in 2009 will most likely have the character traits of an ox. People born during this year will have leadership qualities and be dependable, great organisers, loyal, patient, strong and responsible. They also possess a strong work ethic and have a creative side.

As for the negative traits, people associated with the ox are more likely to be narrow-minded, stubborn, with low public relations skills and not emotional.

Will the global economy be dependable and strong? Will it turn out to be bullish? It is highly unlikely, but only time will tell in the current unstable scenario where a week is history.