One striking feature of the recession that is now hitting practically all economies is the speed of the follow-through to the real economy resulting from the banking crisis that in September sent financial centres in an unpredicted downward spin. Normally, financial events take a lot longer to affect growth and longer still to hit employment.
This time, however, in most industrialised countries the effect has been instantaneous. The smaller economies like Malta that did not suffer from the financial crisis in any dramatic way, suffered soon after as the impact on employment and earnings in the major economies, on which markets the smaller economies depend, rocked them to an unsustainable degree.
The near meltdown of the banking system hit credit, particularly trade credit, hard and walloped confidence all over the world. This time round it was not just the USA, Japan or Great Britain but all the major economies. Business behaviour changed immediately as the trade credit crisis hit major businesses hard and in real time.
The impact on businesses such as manufacturing, major industries and service providers, that together employ millions, was much more rapid than the impact on consumer behaviour. The impact on consumer behaviour came soon after. As the consumer credit crunch hit hard, people lost their jobs and their homes and everything around began to bear the impact of the crises. Here in Malta we only read about it and for most people it was something that affected others.
When I literally screamed on Budget day that we were not bold enough and that we were not realising how deep this recession was going to be, some promptly criticised that I was too negative. Unlike many people, however, I have lived through previous recessions holding important posts with great macro-economic management and I know perfectly well that the question of a world recession rebounding in little Malta was a matter of a few months before orders for exporters and hoteliers dropped dramatically.
I also had the experience of how to defend our entrepreneurs. Most of our firms, exporters, tourism operators, Freeport, service providers and the others that depend on them such as the leaders that bring the orders from abroad and all others that supply them to help them deliver to an overseas client, are essentially strong but not so resilient.
The weakness of most of our firms is their weak capital structure. They are incapable to withstand an extended period of low activity and, unless financially relieved by Big Brother - the state - they simply would not be able to survive a long recession in world markets. I strongly urged the government to act on an enterprise by enterprise basis, helping firms not only to live through the recession but to compete even in a deflationary market were prices for manufactured goods and for hotel beds were being dumped.
This is now happening. Not as much as I would like, as an economist and as director general of the Chamber of Small and Medium Enterprises - GRTU, but enough not to let the recession swallow us. We must keep our seatbelts fastened as the economic tremor is still wild.
Many out there believed, up to November, that this time round, given the world experience of handling recession, it will be a mild recession. I think some individuals in Malta also thought so. They would not have predicted in November that the Maltese economy would, in 2009, grow by 2.5 per cent and advised the Minister of Finance to include this as a basis for his Budget 2009 predictions. But we all now know the prospects of a mild recession turned into the reality of a deep one.
How deep and how long? The International Monetary Fund is very pessimistic on the economic growth prospects of many major economies. The IMF will soon give us a proper update of all major individual European economies. This will help us assess the impact on the European Union economies and on smaller economies like Malta and could help us better define the timescales for revival.
In the meantime, we can get some ideas from historical evidence. Paul Ormerod, the leading economic historian of Valterra Consulting, has just published a paper that analysed all recessions hitting advanced economies since 1871. A total of 255 recessions were registered between 1871 and 2007. Each recession has been defined as an episode in which gross domestic product falls from one year to the next.
It is interesting that Mr Ormerod says that most recessions end quickly. Sixty-four per cent of recessions suffered only a single-year GDP fall. Next most common, 23 per cent were two-year recessions. Three-year recessions are rare but they happened 20 times, just under eight per cent. Four-year recessions occurred only six times; two per cent of all recessions. There was one example each of a six-year and a seven-year recession.
Recessions are generally self-correcting as they are usually cyclical.
Firms feel the world is in a good economic situation and consumer confidence is high, they over produce and they over order raw-materials and some manufactured goods and services (these are the kind of orders on which Maltese firms live or on which the Maltese economy depends). When recession hits, they are forced to cut back and supply demand out of stocks (inventories). Production cutbacks drive the economy into recession and only when stocks are so low that firms start producing again do we come out of it.
There is an element of all that in the prevailing global recession, though, as many leading economists point out, it is essentially the product of two big shocks suffered by major economies: the credit crunch and last year's oil and commodity price surge.
The good news is that the recent G20 gathering of Finance Ministers and central bankers resolved, on a commitment by central bankers, to explore further ways of boosting their economies by unconventional measures. This is really a commitment to boost the money supply by extraordinary measures. Most central bankers are normally terrified of this as such measures lead to an immediate surge in inflation and this could be counter-productive.
Most leading economies are in a deflationary spiral, that is, prices are falling and inflation is negative (Malta is one of the very few countries where inflation keeps rising!) so implementing what the economists call quantitative easing - printing of money - is an unprecedented action that will push economies without danger of immediate inflation.
In America, the Federal Reserve board approved monetary interventions that will move the country's deficit to 12 per cent of GDP. The economy is receiving boosts of unprecedented size and form. President Barack Obama now predicts that by borrowing trillions (millions of millions) to fund his government's economic stimulus package, the American economy will soon be growing at an annual rate of about four per cent. America is facing the challenge. They are showing that they are not afraid to shoulder their responsibility to lift the world out of recession sooner, rather than later.
This will bear results. We will be out of the recession sooner than many predicted. Here in Malta we need to hold tight. The government needs to intervene more. The central banks need to be more courageous.
The Malta Financial Services Authority needs to ensure the banks manage better the availability of credit to enterprise. Tightness of credit and a squeeze on accessibility of funds to business will lengthen our recession.
The opposition in Parliament needs to grow up and stop just criticising. It must join forces with the government and with the business community to help the country sail through a very difficult period. If we act together, and smartly, little Malta will also be out of it in a shorter period than the professors of doom are predicting.
Mr Farrugia will be contesting the European Parliament elections on behalf of the Nationalist Party.