Most economists and analysts expect the eurozone to go into recession this year and it is therefore likely that the global economy will suffer as a result. Malta’s economy could well be negatively affected by the situation in the eurozone and the government will have to do whatever it can to prevent the Maltese economy from going into recession.
An Israeli attack on Iran coupled with the eurozone crisis would be just too much for the world economy to handle
As a result of the global financial crisis of 2008 – 2009 Malta’s economy went into recession in 2009 but economic growth returned in both 2010 and 2011. The government had focused primarily on supporting Malta’s tourism and manufacturing sectors, and this policy paid off. Significantly, no layoffs took place, and the government will no doubt have to resort to the same type of help should this be necessary.
We can expect the eurozone crisis to continue into the year, and although progress has been made in tackling the single currency’s problems, more will need to be done. Malta will have to continue to do its part in solving this crisis and there are mixed opinions about whether the 17 nation single currency bloc will survive intact by the end of 2012. The consequences, however, of a break-up of the eurozone will be catastrophic and will definitely result in Europe, and probably the world, entering a deep recession.
The likelihood, however, is that the European Union will do whatever it takes to save the euro and the harsh austerity measures will continue to be implemented in Italy, Spain, Portugal, Ireland and Greece. Whether Greece will remain in the eurozone by the end of 2012 is still questionable – the bloc could probably survive a Greek exit, although there would be serious problems, but it certainly would not survive an Italian or Spanish default.
Another development that can affect the global economy is the escalation of the war of words between Iran and the international community, particularly the US, over Teheran’s nuclear programme. Iran has threatened to close the Strait of Hormuz, which is used by 40 per cent of the world’s oil tankers, in retaliation for additional international sanctions which are to be imposed on the country over its nuclear programme.
Furthermore, Iran also implied it would take military action if the US Navy moves an aircraft carrier back into the Gulf region. A military confrontation between the US and Iran would badly affect the markets, have negative consequences for the world economy and lead to less oil supplies on the market. If the Strait of Hormuz had to be blocked, the price of crude oil would almost certainly rise dramatically, thus adding to the world’s economic woes. In Malta, this could mean even higher water and electricity bills, and higher petrol prices, which is bad news for both consumers and industry.
The worst case scenario, however, would be an Israeli attack on Iran’s nuclear facilities, which would have far reaching global political and economic consequences. There would be regional instability, increased terrorism and economic uncertainty. Malta, of course, would not be immune to the consequences of such an attack. An Israeli attack on Iran coupled with the eurozone crisis would be just too much for the world economy to handle.
Although the situation in Libya is still somewhat unsettled, the massive reconstruction that is expected to take place there could provide a welcome opportunity for growth for Maltese businesses. Libya is expected to witness an economic growth rate of 13.6 per cent in 2012, and considering the role Malta played in the Libyan revolution, Maltese businesses could be awarded lucrative contracts.
We can expect the Maltese government to continue to oppose a Financial Transaction Tax, proposed by the European Commission and backed by France and Germany, unless the tax is imposed on a global level. Yesterday’s comment by French Minister for Europe Jean Leonetti that a European Financial Transaction Tax will be in place by the end of year certainly does not help matters.
According to Mr Leonetti – who seems to have forgotten that Malta was against this tax – only Britain and Sweden opposed the introduction of this new measure. In any case, the pressure will certainly increase on Malta this year to accept such a tax, but the Maltese government will be equally pressured by the financial services industry to continue opposing it. The European Commission’s proposal consisted of the introduction of a tax in 2014 at 0.1 per cent on share dealings and 0.01 per cent on derivatives and other financial products that would raise €55 billion per year, to be shared between the EU’s central structures and its 27 member states.
Malta’s economic growth last year is expected to be in the region of between 2.3 per cent and 2.5 per cent, and the government is more or less hoping for the same growth rate this year. Given the difficult global economic climate, this will be quite a challenge.
We will have to see whether the €10 million tax cuts for working parents, which take effect this month, will boost the economy and make the labour market more attractive for parents. Finance Minister Tonio Fenech said in his Budget speech that the government was “constrained” by the enormous crisis in the eurozone and was not in a position to implement its electoral pledge of reducing the top income tax rate from 35 per cent to 25 per cent, which would have cost €40 million. We can therefore rule out any further income tax cuts in the next Budget, for 2013.
Malta aims to reduce its deficit to 2.27 per cent of GDP by the end of this year, down from the estimated 2.8 per cent of GDP for 2011, while the public debt target for 2012 is 68.91 per cent, down from the 70.15 per cent of GDP estimated for 2011. Both targets will not be easy to reach, considering the European and global economic climate.
There is a possibility that an election will be held this year, due to various statements by Nationalist backbencher Franco Debono that he would not vote with the government unless the Ministry of Justice and Home Affairs is split. In this economic climate, an election would definitely be very bad for the Maltese economy.
We can expect some major developments over the future of Air Malta, and the probability is that the government will do whatever it can to save the national airline, which plays such a crucial role in Malta’s tourism industry.