Business leaders urge caution over latest recession figures
While business leaders are concerned about the Maltese economy entering into recession, they stress that this could be a temporary blip and have called for the situation to be carefully monitored. They also point out that the situation in the eurozone contributed to the latest negative growth figures for the Maltese economy and called for improvements in Malta’s competitiveness.
Joseph Farrugia, director-general of the Malta Employers Association said the fact that Malta registered a negative GDP growth for two quarters in succession is certainly a cause of apprehension.
“There is the primary concern of a shrinking economy and there has to be a clear analysis as to what sectors have actually reduced their output to the extent that contributed to this state of affairs. Another aspect is the impact on the fiscal situation. The revenue and expenditure projections of the last government Budget were heavily dependent on economic growth, so one has to see the impact on the deficit of the fall in GDP growth, although the government had already announced cuts in expenditure to allow for growth projections which were revised downwards earlier this year,” Mr Farrugia said.
He said he was particularly concerned about the Governor of the Central Bank’s statement that Malta’s statistics may not be representing the true state of affairs due to the impact of inventory changes on the calculation of GDP.
“I suggest that this matter is dealt with urgency as it is clearly distorting the figures, especially if it is true that these fluctuations contributed to a negative of six per cent in real GDP in the first quarter of 2012. This figure has to be broken down to determine whether economic activity has actually slowed down during the first quarter, or whether this is owing to adjustment for statistical discrepancies.”
Mr Farrugia said it was important to determine which sectors are the most affected and whether the reasons are domestic or more related to the international economic climate.
“It might be the case where we have just ‘brushed’ with a recession and the economy will recover in the second and third quarters, thus bringing growth projections back on track. What is required is monitoring and if necessary focused action similar to that undertaken during the 2008-2009 recession.
“What I find peculiar in this scenario is that, when the economy slowed down two years ago when the financial crisis hit, there was an immediate response in the unemployment level, as is normally expected in such circumstances. Thus far, this has not happened yet this time round. This could be the result of a number of factors, amongst them that many companies had spare capacity which absorbed the brunt of the fall in production; that physical production remained stable but its value fell because of the situation of the euro; that the fall in GDP is actually resulting from the inventory adjustments referred to earlier; or a combination of these, and possibly, other factors,” he said.
Mr Farrugia believes the major cause of the slowdown is the international situation and the eurozone crisis in particular.
“The repercussions of the crisis are being felt not only in the countries that are in the epicentre (such as Greece, Spain and Italy) but also with their trading partners. It appears that many major economies are stuck between a rock and a hard place, the rock being the fiscal consolidation/austerity measures which are inevitable to tackle unsustainable debts, and the hard place is the impact of these measures on aggregate demand and unemployment.”
Mr Farrugia said that although he did not believe there is a direct relationship between Malta’s recent political turmoil and the recession “there is tremendous disappointment at the detachment of the parliamentary agenda from national economic and social priorities”.
He added: “While our house is burning, our political class has been wasting precious time on ego trips, character assassinations and petty power struggles. This is certainly not what workers and employers expect from our politicians.”
Chamber of Commerce, Industry and Enterprise director-general Kevin Borg said that Chamber noted the latest GDP figures which “technically” place Malta into the recession definition.
“Nevertheless, for the Malta Chamber this does not mean that the country is facing a crisis but a temporary shock. Diversified as it is, our economy is in good shape and we are managing to maintain a good socio-economic balance. The country managed to attract good business across a wide range of economic activities – financial services, digital gaming, high-end manufacturing and aircraft maintenance. Our economic ‘robustness’ has also been consistently acknowledged by independent sources such as the IMF and the European Commission,” he said.
Mr Borg said the Chamber is seeking the necessary clarifications on the statistics themselves as certain elements of GDP composition warrant further explanation – a point, he stressed, also highlighted by the Central Bank Governor.
He added: “According to monthly business confidence surveys, undertaken by the Malta Chamber in collaboration with PricewaterhouseCoopers, business confidence has been on the increase since February 2012. These surveys form part of the Joint Harmonised EU Programme of Business and Consumer Surveys (BCS).”
Mr Borg said that while the Maltese economy had received positive reports from the IMF and the European Commission, both institutions have given Malta clear signals to protect its competitiveness.
“The Malta Chamber’s calls have run parallel to those of the IMF and the Commission, urging the authorities that the country cannot afford to take its competitiveness for granted,” he said.
“We were pleased to note the Commission’s emphasis on similar pressing recommendations which we, ourselves, had been consistently making, on pension reform, our COLA mechanism and specific labour market rigidities. Furthermore, maintaining stable public finances is a prerequisite for competitiveness because it gives the country stability and reduces pressures for higher tax burdens.”
Mr Borg said the Chamber believes the eurozone crisis contributed to the recent developments in Malta’s GDP figures, because Malta’s main export activities, manufacturing and tourism, are strongly linked to eurozone markets “so Malta cannot expect to be immune to the turmoil surrounding us”.
Business analyst and former banker John Cassar White told The Times Business that an economy in recession is always a cause for concern.
“It is not surprising that we find ourselves in this situation as we depend on exports for our economic growth and our markets at present are distressed. At the same time we have to learn to live with economic cycles and as long as we continue to target the long term issues that can affect our future prosperity, then we need not be too disheartened.”
He added: “When looking at GDP growth from a value-added perspective, one finds that the main generator of GDP growth at market prices (nominal growth) in the first quarter of 2012 came from increased revenue from taxation, mainly VAT. The economic sectors in fact registered a -0.2 growth in GDP with a mixed performance: financial services, professional activities and public administration showed some growth, but manufacturing, construction wholesale and retail and accommodation continued to decrease. On the other hand an increase in taxation amounted to 1.2 per cent of GDP in nominal terms year on year.”
Mr Cassar White said Malta could not do much to affect the economic situation in those markets on which it depends so much for its exports of goods and services.
“We need, however, to continue focusing on improving our competitiveness by ensuring that our educational system gives us the results that we aim for, invest more in training of workers, and encourage private investment to revitalise our present businesses and encourage new ones to set up. At the same time we should continue with the reforms of our public finances to ensure that our health and social services are sustainable and effective in the long term,” he said.
Mr Cassar White attributed the weaknesses in the eurozone to two factors: loss of competitiveness as a result of globalisation that has revealed how over the past two decades the emerging economies – like those of China and India – have been able to produce much more economically the goods and services that the global markets want than European countries; the second reason behind the European economies’ weaknesses is the lack of political leadership that has so far proved incapable of reforming the fiscal, economic and political infrastructure that supports our common currency –the euro.
Mr Cassar White believes the local political uncertainty is doing nothing to help the country get on with the job of continuing to modernise its economy.
“Business does not like uncertainty and at the moment we are facing political uncertainty. The months leading to an election are unlikely to dissipate this uncertainty. This will not help our recovery. One hopes that in the coming months our political leaders will focus more on the economic priorities of the country and less on the political ones. Individual politicians may come and go; the economy with its positive or negative effects on families and businesses will be with us forever,” he said.