Consumption and GDP figures

Consumption plays a strong part in the composition of GDP. Larger countries focus on it much more than we do, because consumption demand tends to be satisfied to a telling extent by domestic production.

The retail polarity is rapidly shifting towards Sliema- Lino Spiteri

There remain leakages into imports. But not to the extent that they exist in Malta, which imports all the raw material inputs that go into production. The part of consumption satisfied through local production is limited in scope in so far as stimulation of economic activity is concerned.

To say that is not to belittle the importance of local industry aimed at local consumption. It is merely to state an economic fact which has to be borne in mind when it comes to economic planning. That said, domestic consumption is important not only for producers targeting the local market, but also for local retail trade.

In this regard there have been two recent developments which shore up each other when it comes to relevance in economic activity. One is that retail trade has been declining compared to a year ago. That is a net statement. It cannot, therefore, be negated by the fact that retail outlets have been mushrooming, thus increasing competition to cutthroat levels. An early case in point was the successful Plaza venture. It was copied in several other instances, but so far none more so than the impressive development of The Point by the Midi consortium at Tigné.

Extension of superior retail enterprises inevitably affects existing outlets, leading to a number of them closing down. But, still basing on the overall situation, that does not explain the decline in combined retail trade. The probable explanation lies in the other main development referred to above. That is the year-to-year decline in consumption. That shows buyers are consuming less. That is happening despite the impressive performance of the tourist industry in the second and third quarters of this year.

The conclusion one can draw is that domestic demand is falling, and is not being fully compensated by increased demands by tourists. That is what the statistics are signalling. The question to ask, if it is the case that net local demand is falling, is why that is happening. The answer might lie in the price level, which is on an upward trend. A popular impression is that high water and electricity tariffs are eating into disposable income, squeezing out demand on goods and services. That is possible. But, in a dramatic change of direction, the government is now subsidising Enemalta to keep tariffs stable, effectively absorbing the loss against exchequer revenue and the public debt level.

That opens space for a political discussion about the policy somersault inherent in the direction shift. But this is not the place for such a discussion. Another reason suggested for reduced retail consumption is the outlay on mobile telephones and their use. Admittedly, that is growing. But it has been in contention for some time now and it is unlikely that it is a causal factor on a year-to-year basis. There are also contradictory signals. For instance, tourists aside, restaurants catering for local consumers still attract a very brisk trade.

The reason for differing situations – areas of brisk local trade against an overall decline in consumption – is probably due to market segmentation. There are retail areas that are doing well and others that are doing not so well or are actually declining. If this is the case there is very little that policymakers can do. As with swathes of the micro sectors of the economy, the solution, to the extent that it exists, lies with the retailers themselves. Those who went out of business or businesses that decided to close out part of their outlets, have done their arithmetic. Others who are still open but are facing lower sales have to consider their physical resources (the retail outlet), their prices and after-sales service.

I came across an example through personal experience. My hairdresser came face to face with sharply increased competition in the form of a couple of other hairdressers setting up in the same area.

This made him check his charges relative to those of his new competitors. In addition he had to take into account that they were operating out of brand new premises. He could not go into the expense of changing his furniture and equipment, which were good enough, anyhow. But he spruced up his outlet, installing TV sets plus increasing the personal attention he gives to his clients, and ensuring spick and span cleanliness.

Some retail outlets cannot compete with the new competition in town, especially with the big players like The Point outlets. But they can squeeze out improvements in the service they give. This applies in particular to outlets outside Sliema and Valletta. They too feel the pressure of new completion by the big operators, which is drawing customers away from towns and villages. But they are in a good position to offer improvements.

All this, however, is subject to a basic reality. Competition cuts across many considerations. For instance, Valletta has long been the Mecca for shoppers who prefer not to buy from their towns and villages. That is changing, and quite radically so. The retail polarity is rapidly shifting towards Sliema. The Point complex accounts for the shift, but only in part. Shops, restaurants and cafes away from The Point are also in the main doing quite well.