The story I am referring to is the economic recession that the major economies are plunged into. Every day brings with it its news; some negative, some positive. Over the last 10 days we have had the European Central Bank cutting its interest rate within the eurozone to two per cent. In the UK, fears continued to be expressed as to whether all the toxic assets of the commercial banks have been disclosed. In the UK, as well, the government has provided further bailout money to the banking system and is seeking to ease the credit crunch by getting banks to start lending money again.
In the main European economies, efforts continue to be made to stimulate consumer spending. Earlier this week the European Commission published its forecasts for the medium term for each of the member states. Where is all this heading to? With the price of oil at under 50 US dollars a barrel, interest rates at two per cent or less, inflation pointing downwards, and some sort of stability in the financial markets, there must be hope that the international economy would start once more to move forward.
Unfortunately, the lower price of oil has not necessarily meant a lower price for energy products, while commercial banks (even in Malta) have not passed on to borrowers the full cut in interest rates.
Commercial banks abroad have bagged the bailout money to shore up their balance sheet, but are very wary about lending money following the policies of profligacy of recent years.
The end result is that business and consumer confidence remain very weak, thereby contributing further to the economic downturn.
Somehow one would expect that the outlook would not need to be so negative but, in fact, it is; and any forecast made today could well prove to be erroneous the next day, as the story continues to unfold.
An article in the leading Italian newspaper Corriere della Sera asked a series of questions. How long will this recession last? How many people will lose their jobs? Will we go back to the 1930s when the recession evolved into what was eventually called the Great Depression? To what extent will the public sector patch up the holes left gaping by the private sector? We could add a question about Malta. To what extent will the international recession have an impact on our economy?
These questions are likely to remain unanswered in a definitive way for some more time. This is more so when one notes that the chairman of the US Federal Reserve told his audience in London last week that the final cost of bailouts around the world is expected to be much higher than what is being estimated today.
The forecasts for the medium term by the European Commission also provide us with some history. Economic growth in the EU is estimated to have been one per cent last year, down from three per cent in 2007.
The forecast for this year is a contraction of under two years, although growth is expected to remain positive in nine member states (of whom Malta is one).
The cause of this negative outlook is judged to be the extent and depth of the crisis in the financial markets which has impacted in a manner worse than expected on the so called real economy. EU employment is expected to fall this year by over three million jobs, while unemployment will rise to 8.75 per cent, and a further rise is expected in 2010.
The US is waiting for the Obama recipe, and even this will contribute to the continued unfolding of the story. In the meantime, estimates for the US economy show that this will contract by over two per cent this year and will, at best, grow by 0.5 per cent in 2010. Thus the indications are that the US economy will really suffer more than the EU economy. Whether this will turn out to be so, we will need to wait and see.
The situation in Malta is still not showing any dramatic downturn. However, we cannot hope forever that the traditional resilience of our economy will be able to withstand the tide of this recession.
It may do so, but it may also not. The government has been correct in not panicking into action. It will need to follow the situation carefully and act firmly when the time comes. We need to continue watching the story unfold...