News | Wednesday, 24 June 2009

In deep recession

The latest figures announced by the National Statistics Office (NSO) last week indicate that Malta’s Gross Domestic Product (GDP) for the first quarter of 2009 contracted by 3.7 per cent when compared to the same quarter last year - confirming that the Maltese economy is in recession. CHARLOT ZAHRA asked two eminent economic analysts: veteran economist Karm Farrugia and banking professor John A. Consiglio for their take on the Maltese economy’s performance in view of such figures, how the Maltese economy compared with the rest of the Euro zone, and the impact on the Government’s forecasts for GDP and Budget deficit for 2009.

John A. Consiglio: : “A drop of 3.7 per cent in real terms is big”

The latest GDP statistics as announced by the NSO suggest two main things to me.
Firstly, it had been obvious from most of the local and world news emerging over the previous six months that our GDP would be impacted and, with much of this news even being focussed on key sectors of our economy, like tourism and manufacturing exports, that the hit would be big, and a 3.7 per cent in real terms drop is big.
The second thought is very much along the line of certain observations which I made about our current economic model in a lengthy paper which I wrote in the recently published book, “Malta in the EU: Five Years on and Looking to the Future”, as part of the University’s European Documentation and Research Centre’s Civil Society Project 2009.
There I argued that some serious thinking is needed about whether the current TBCFS (tourism, building and construction, financial services model) is something which we really need to have a look into.
Can we start downsizing some parts of this model, and replace by others?
The current recession is not hitting with the same level of impact right across all sectors of the Maltese economy.
Profits in the retail and imports, agriculture, and building and construction sectors are probably not as much into a nosedive as those of that part of the industrial sector which caters for local demand or for foreign demand on a small scale.
Public sector productivity figures also, in my humble opinion, need to be again looked at and perhaps some figures there might tell Government something about the way the European Parliament elections went the way that they did.
Our figures are obviously working better than those of some Euro zone countries, and worse than others, but I’m never really happy or convinced either way indulging in that sort of comparative exercise.
If we go down and everyone falls back, is that anything to feel consoled about? If we are very far away from this so-called “European average” couldn’t there be valid reasons for that? And so on and so forth.
We need to be concerned about our performance, and have valid reasons for however we, not anyone else anywhere, may feel about it.
Conceptually we could even have a very good and satisfying performance when everyone else would have done much better than us. Big deal! I hope we’re not in the EU motivated by such silly reasoning that we should be “similar” or “comparable” to them in all things and all the time.
The Finance Minister undoubtedly reviews his GDP projections regularly. After all that’s the whole point of having an in-house economic model.
More than us on the outside, his model is constantly being fed, I would presume – with data that also includes expected project – both private and public sector – completion dates, industry order book developments, and many other variables that impact on that figure which we all look forward to hearing at the annual budget speech.
So I will not venture a revised figure for our GDP before around October-November – that’s still five to six months down the road, and much can happen or evolve between now and then, considering particularly that the pace of certain “green shoots” being deciphered both here and overseas is not really known.
This is the time of the year when Government revenue generally starts an upward trend, with the larger tranche of the usual Provisional Task payments coming in the last quarter.
It is always very difficult to know. For example, how many business operators will opt for sending in Revision Forms of their expected incomes, but then risking that they would factually have done better and then being subject to interest or fines for under-self-assessment.
So estimating revenues, let alone expenditures, is always a very difficult exercise.

Karm Farrugia: “Exactly as expected”

What is your comment about the latest GDP statistics announced by the NSO?
Was the downfall in the GDP of 3.7 per cent in real terms during the first three months of the year as bad as expected? Why?
Exactly as expected. One must not forget that the NSO figures compare Q1/2009 with Q1/2008, two quarters a year apart. They don’t necessarily reflect annual movements.
What is really important is the deflator that was used to transform nominal into real amounts – too high a deflator when considering that the country was in recession throughout the whole of Q1/2009 and earlier.
There is not enough competition in the economy to control inflationary trends. That is why I previously described the economy as “dysfunctional”.

According to the NSO figures, and from your own personal experience, which are those sectors of the Maltese economy which are not performing as well as the rest of the economy?
All sectors must be somehow hit; some more than others. Manufacturing, tourism, even construction - are the chief sufferers; retailing probably comes next, with the least sufferers being internet gambling, and real estate.

In your view, what effective measures should the Maltese Government take to stimulate those sectors of the Maltese economy that are being worst affected by this recession, while at the same time maintaining fiscal prudence?
What the Government has been doing to protect jobs is praiseworthy – it may, however, not be enough. The economy needs stimulating through public investment schemes via the Capital Budget, whilst the Recurrent Budget needs more than just pruning.

How do the latest GDP figures for Malta compare with those of the rest of the Euro zone?
We are fast approaching the euro zone’s average. There will, of course, be some in a worse position than us. It all depends on how we perform this current quarter and the next.

In view of the latest GDP figures for Q1, should the Central Bank Governor revise the GDP forecast for 2009 again or not? Why?
What would be a more realistic revision of the GDP figures for 2009?
I think the Central Bank should wait until mid-July when in possession of draft figures for Q2/2009 before announcing another revision. It is only then that one could possibly dare forecast for the whole of 2009.

In view of the latest GDP figures, do you think that the budgetary forecast for 2009 of 2.4 per cent growth for this year is still tenable or not? Why?
Definitely not. It would be a miracle if we end up this year in positive growth territory.

How will the NSO’s latest GDP statistics effect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech?
Yes. I think the Minister should announce a revised budget for the second half of this year. His intention not to introduce any new taxes is irrelevant; the Budget also has its Expenditure side, which is today much more important, especially the Capital part.
The current budget is not realistic. Only the Minister and his advisers possess enough details to say what would be realistic.



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24 June 2009

Malta Today


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