At the end of last week, a data from an online poll indicated that the major personal concern of Maltese people is their level of income.
A majority of respondents to the survey claimed that now is not the appropriate time to make important purchases. Yet a significant majority claim they are satisfied with the country’s economic situation and with their personal economic situation. The economic data also seems to suggest this positive economic trend.
This made some people question how it can be that the primary concern of people is the level of their income and yet they are satisfied with their own economic situation and employment data continues to be positive. Is there a contradiction? One can brush aside such comments by referring to the saying that the more one has, the more one wants. However, that would be a very superficial approach. I believe that policymakers need to understand what triggers such an apparent contradiction in people’s minds.
There is likely to be a demand for higher wages, even though the principles of competitiveness demand that wages should not be growing
The section on Malta in the European economic forecast published recently by the European Commission is headlined: ‘Dynamic growth and low unemployment ahead’, the economy is estimated to have grown by 3.3 per cent in real terms in 2014. The rate is expected to be lower in 2016, but by that time the budget deficit will have gone below the two per cent level as a percentage of the GDP.
There is some devil in the detail: the main driver of growth in 2014 was domestic demand, which grew by 4.1 per cent while there has been a drop in net exports of 0.9 per cent. Moreover, real unit labour costs are expected to drop in 2015 and 2016 after showing marginal growth in 2014. Even here we seem to have an apparent contradiction. Local retailers have claimed that they have experienced a drop in sales, while data is showing an increase in domestic demand. And how can people be satisfied with their economic situation, if it is being estimated that real unit labour costs will drop in 2015?
We need to look for the answer in the level of business and consumer sentiment in the country. Students of economics learn in their first lesson in the subject that the fundamental issue in the study of economic theory is scarcity. We never have enough resources to satisfy our needs and wants.
Therefore it is not how much money I am earning, but whether I can satisfy my needs and wants with what I earn. And my needs and wants are a result of expectations. As my expectations grow, my needs and wants become greater, and will become even more difficult to satisfy with whatever resources I have. Consequently, my major personal concern becomes not enough income, even if my disposal income would have increased by much more than the inflation rate. This gets me to the title of this week’s contribution.
Therefore, to my mind, the aspect that one needs to understand is what the expectations of the Maltese are in respect of the national economy and in respect of their financial situation.
Although no published data exists, I would hazard a guess and say that very few people in Malta expect the economic situation of the country or their own financial situation to get worse.
The downside to this is that as expectations become greater and optimism about the future abounds, there is likely to be a demand for higher wages, even though the principles of competitiveness demand that wages should not be growing.
This is why we have got to the stage where we must manage expectations. Our economy may have faced some turbulent times in the last 28 years; but it has never been in a crisis. So far we have managed to control the negative impact of the external environment. However, we can never be sure it will always be like this.
It is the wish of each and everyone of us to improve one’s standard of living and to see our national economy thrive. However, this needs to be done in a managed way.