Politicians, journalists, economists and ordinary people have been speculating for months on whether the local economy is really out of the woods. The initial political evaluation that Malta would escape the worst aspects of the global recession has understandably proven to be no more than wishful thinking.

Various arguments were brought to support this fallacious prediction. We were told that our financial system was essentially superior to that of other western countries because our bankers were "more prudent". This may have been the case but the reality is that when the local economy starts to stutter, our banks too would begin to feel the affect.

There is no doubt that our economy is stuttering. Exports have fallen by 31 per cent in the first few months of this year, tourist arrivals are down by 14 per cent and the economy in the first quarter of this year shrunk by 3.3 per cent.

This negative trend is now corroborated by a recent survey published by the European Commission on business climate indicators in the EU countries. The economic indicators for Malta are less encouraging than the government would like us to believe.

Business confidence in the second quarter of 2009 was only marginally less negative that in the first quarter, indicating that we have still not turned the corner in this recession. Similarly, production trends remained at roughly the same level as in the first quarter.

This indicates that the fall in exports may not have hit the bottom yet. Add to this the expectation of business that prices for their products will fall in the next two quarters and one can easily conclude that we are still not out of the woods. The strength of the euro could be one factor that is making exports form eurozone countries less attractive.

The projections on services, especially on tourism, are not solid enough. But anecdotal evidence of a worsening trend is corroborated by monthly statistics about decreasing tourist arrivals and falling expenditure. The acid test for tourism will, of course, be this summer season and one hopes that we will at least hit the 2008 figures in the peak season to make up for the falls in the low and shoulder periods.

Perhaps the most indicative figures in the European Commission survey are found in the consumer confidence research. In the second quarter of 2009, consumer confidence is reported to have deteriorated significantly.

The increase in unemployment, the growing uncertainty affecting those still at work, falling overtime income and a general crisis of confidence is taking its toll on consumer morale.

The latest increase in fuel prices has more than offset any positive feeling emanating from the small cuts in energy rates just prior to the European Parliament elections. No doubt, ordinary people recognise a red herring when they see and smell one. They know that energy prices, including the price of bottled gas, are bound to go up again soon.

The effect of this negative atmosphere is that families are consuming less and, yet, this is not having a marked effect on savings. Presumably, families are having to spend more money to stay where they are; the proverbial situation where one has to run faster to remain in the same place.

Most worrying is the escalating inflation rate. In May 2009, our inflation rate was still a hefty 3.3 per cent when the average rate of eurozone countries was a negative growth rate. As long as the government persists in holding energy prices at extraordinary levels despite falling trends in oil prices internationally, Malta will continue to be affected by a worryingly high inflation rate. This is further risking our competitiveness.

The economy needs a morale-boosting stimulus to get out of the present slump. Not only are we still nowhere near a recovery but we risk further deterioration unless the government makes the right decisions in the next budget and even before that. One definite blunder would be to increase the tax burdens in whatever form on families and businesses. Let us hope that common sense will at last prevail.

Dr Mangion is a Labour member of Parliament.

cmangion@keyworld.net, www.mangioncharles.com