Last week I wrote about the continued unfolding of the story relating to the international economic situation. Since last week, the European Central Bank issued its monthly report. In the meantime, within the financial sector, banks (in other countries) continued to uncover bad loans, leading the average man in the street to suspect that banks have not as yet told the whole truth about the sanity of their loan portfolio. Turning to the real economy, several companies in the leading world economies continued to report job losses. In spite of this, governments continue to appear hopeful, seeking to send messages that they are in control of the situation.
In its monthly report, the European Central Bank reiterated the seriousness of the current international economic situation, especially since it seems that the major economies are slowing down in synchronisation with each other. Thus there is not a single economy that can act as a locomotive for the rest and pull everyone out of the recession. The ECB is in agreement with other opinions already expressed as to the cause of this recession. Using very diplomatic language, the ECB does state that it is the turbulence in the financial markets that is leading to a decrease in demand and a decrease in business and consumer confidence.
The ECB also states that the drop in the rate of inflation and the easing of monetary policy within the eurozone (that is the decrease in interest rates) should increase the purchasing power of consumers (one needs to note that even in this respect the ECB is not being very definitive).
Moreover, it does sound one note of warning. It refers to the cost to future generations of this recession. It is essentially referring to the polices being adopted by a number of governments within the EU to stimulate their economies and stave a further worsening of the crisis in their financial markets, by ignoring all principles of fiscal prudence that have been applied in the last years.
It is this issue that gives rise to the title of this week's contribution. What exactly is happening in the 27 EU member states with regard to economic growth and public sector finances? The report published by the European Commission some two weeks ago, giving its interim forecast for this year and the following one provides us with the answer. The comparisons that need to be made are indeed odious because not all countries have been hit by crisis in the financial markets and the subsequent international economic recession in the same manner. Thus the response has been different from one country to another.
In overall terms the gross domestic product in the EU grew by one per cent last year but is expected to contract by 1.8 per cent this year and to grow by just 0.5 per cent in 2010. Inflation will drop this year from the level of 3.7 per cent last year to 1.2 per cent. The fiscal deficit represented two per cent of the gross domestic product and is expected to represent 4.4 per cent of the GDP this year, and 4.8 per cent in 2010. Employment grew marginally by 0.9 per cent last year and is expected to drop by 1.6 per cent this year and by 0.5 per cent in 2010. Thus there is a very negative outlook for this year, with an expected level of stability (but not necessarily an upturn) in 2010. Analysts seem to highlight all the time the level of business and consumer confidence which is inhibiting investment and consumption expenditure.
How is Malta faring according to the EU? This is where comparisons start to become odious. The growth in the gross domestic product was estimated to be 2.1 per cent last year (more than double the EU average) and is expected to grow by 0.7 per cent this year and by 1.3 per cent in 2010. Both private consumption and investment will grow this year, while in the EU as a whole they are expected to contract. Employment is expected to continue growing this year, albeit at a much slower rate than last year and previous years. The fiscal deficit should have been around 3.5 per cent last year, but is expected to go down to 2.6 per cent this year. As such, the Maltese economy is faring much better than the EU average.
If we have to make an odious comparison, we should look at a country which is always cited as one of our major competitors in the area of foreign direct investment. It is also cited as an example that Malta should emulate, given its high growth rates in the past years. I am specifically referring to Ireland. The Irish situation can only be described as precarious. GDP contracted by two per cent last year, and is expected to contract by a further five per cent this year.
Investment decreased by 18 per cent last year and is expected to decrease again this year, this time by 26 per cent. In terms of investment, Ireland went back to 2004 levels at the end of last year. Employment decreased by 0.9 per cent last year and is expected to decrease again by four per cent this year.