The Christmas festivities are over and a number of retail establishments are counting their losses or gains. For a number (as yet unspecified) there has been an increase in sales compared to 2007; while for others (as well unspecified in number) there has been a drop in sales. So the question that is being asked in an objective manner is, "What type of recession is this meant to be?" I have always contended that the difficulties that our economy shall be facing throughout this year will be those that will originate from beyond our shores. Otherwise there appears to be no reason to make one believe that a slowdown in our economy would be created because of our own policies.
The economic slowdown in the world's major economies (countries like the UK are experiencing negative growth, while countries like France are still showing positive growth but at a smaller rate than previously) owes its origin to the increases in the price of oil in 2007 and the first eight months of last year and increases in the prices of commodities and foodstuffs.
The crisis (better call it Armageddon) in the financial markets and the subsequent credit crunch are exasperating the situation. The consequence has been a drop in aggregate demand because people, in these major economies, feel less wealthy and their purchasing power has been negatively affected.
Since the success of our economy depends on its ability to sell goods and services to these major economies, it is legitimate to expect that eventually even companies operating in Malta would be facing a drop in demand. For example, the November 2008 figures for tourism already show a significant drop, reflecting this reduced demand. The fact that a major drop occurred in tourists coming from the UK (probably the country within the EU that has been worst hit by the recession) is in itself proof of how reduced demand abroad is likely to have a negative impact on our economy.
The situation abroad is probably creating an element of uncertainty locally that has induced Maltese consumers to spend less. To this, one needs to add the increases in the water and electricity charges. Both issues together would explain why a number of retail establishments have reported a quieter Christmas than previously.
However, in spite of these issues, I do not believe that so far (because at present I can only write 'so far') we are experiencing any form of economic stagnation. The latest figures on employment are those relating to the third quarter of this year (which may seem like dinosaur years away) and indicate a significant growth in the number of employed people.
Going back to what is happening in the international economy, this week we have had news that the rate of inflation is considerably lower than that experienced this time last year.
The price of oil is also around a third of what it was in August. The change has been so dramatic that one wonders when the impact of lower prices will reflect itself in increased business and consumer confidence and increased spending. It seems that this may take some time to happen as the credit crunch does not appear to be easing, allowing uncertainty to maintain a strong hold on the public's sentiment.
Governments in the major economies need to work hard to ensure that the rate of inflation is kept down such that consumers reacquire some purchasing power. Moreover, they also need to work hard to restore business and consumer confidence by seeking to crush the credit crunch. A combination of these two, which is not easy to achieve, would eventually work its way into increased aggregate demand, and the recession does not need to be so protracted. It may also be that some segments of these economies will emerge out of the recession before others. Thus getting out of the recession is more complex than one may think.
What would this mean for Malta? We need to work hard to maintain a positive business and consumer sentiment. The drop in the international price of oil should mean lower water and electricity charges. However, this is not the end of the story. Businesses operating in Malta need to be flexible and continue looking for market niches that can be exploited to counterbalance the drop in demand from other sources. It is this flexibility that will help us address the complexity of this particular international economic slowdown.
The concluding comment is about the price of property. One common feature between the international economic situation and the Maltese economic situation is the fall in the price of property. This is a variable that needs to be assessed further in terms of its impact on economic growth, both locally and abroad. This is why it has become more difficult to understand the full features of the current international economic slowdown and its potential impact on Malta.