George M. Mangion | Wednesday, 09 September 2009

Enter the second quarter shrinkage

Yes, as it was widely predicted, the second quarter has shown a contraction in GDP growth. In fact the official NSO report states quite clearly that GDP shrank by 1.3 per cent compared to the same three months of last year. It meekly announced that in real terms, GDP contracted by 3.3 per cent. The decline in GDP at current prices, amounting to €18.2 million, was estimated to have been distributed into a €2.9 million rise in compensation of employees, a €29.7 million fall in gross operating surplus of enterprises, and a €8.6 million increase in net taxation on production and imports.
This is not surprising and many commentators have been couching their readers for such an eventuality although the political class has remained in denial of the creeping recession - except for a frank admission last week by the finance minister. This coincided with the introduction of a last minute tax amnesty to defaulters who over the years accumulated over €600 million. As can be expected, even a small percentage recovery will go a long way to offset the recent drop in tax revenue.
Anyone reading local newspapers cannot avoid the persistent news about the drop in tourist arrivals and the sheer decline in manufacturing sales during the last two quarters. Unions of shopkeepers have also complained of a drop in the annual trade fair sales which continued to show slack during the summer months. The sudden demise of a large consumer electronics retailer is a typical case since the owner blamed the recession as the principal cause of his alleged bankruptcy.
Naturally, the tightening of the cash lake due to lower spend from tourism will create a negative multiplier effect of shrinking the cash available for the sub sectors such as restaurants, bars and ancillary suppliers to the hotel industry. Transport, storage and telecoms have also taken their toll with the leading electronics group GO reporting a loss.
Real estate, renting and business activities felt the pinch and property prices in general reported a 5 per cent drop. Large scale building projects have reported a slackening in demand from overseas buyers for their luxury apartments while one or two of the projects have been put on hold hoping for better times. GAP Developments, the company responsible for the Fort Cambridge residential development has announced that sales have slowed because of prevailing market conditions. This is a prestigious development comprising 340 luxury apartments of which about two thirds have been sold to date. Ironically, sales for this year have been dampened by the glut of other luxury units in the Sliema/St Julians area and in particular the mushrooming sprawl of the gargantuan MIDI project spoiling the pristine Tigne Point. Fort Cambridge announced that “while market conditions remained unchanged from that prevailing in 2008, sales did not maintain the same momentum as that experienced ever since the project was launched”.
Can there be a better pointer to the awakening of a recession in Malta one asks? Notwithstanding this drop in demand for property, the correction in prices was welcomed by first time buyers who at the lower end of the scale were finding it impossible to own a house.
True, we cannot complain since the recession has brought with it a severe slump in property prices all around the world particularly in Spain and Ireland. In time this world wide depression in prices will reach us and slash away the years of fancy prices that have been added on to property over the past decades. It is a pity that so far there has no major fall in prices and no unforeseen bounty in bargain prices.
While most young couples seeking their first house have less purchasing power today (because of inflation), the price of houses hasn’t had an equivalent decline. As stated above, first time buyers are finding it excruciatingly hard to find a decent priced home especially if they need to mortgage a high percent of the asking price. Banks started to be choosy on whom to lend even in the risk-free home sector. If you are a worker paid minimum wages or have recently lost your job then your chances are dim.
In the past, the Church used to come to the rescue and grant plots at favourable rates but now the State has acquired all its property so this is not a solution anymore. On the other hand, problems of a social nature on young families who are facing economic hardship do lend themselves to more family breakdowns so the State needs to start addressing the problem of high bank margins.
But while we whine and moan that the recession is now amongst us and surreptitiously bestows its undesired mark, we ignore how the world around us is becoming cautiously optimistic that the worst is over. Could it be that while we started late to enter into recession we shall also take longer to exit? Yes - this may be true because of the latency in our open economy to catch up with overseas cyclical factors. Naturally, our politicians made political capital of this latency and cocooned us in hoping that we are Teflon coated.
The sober warning is that while there are seeing encouraging signs the OECD is cautions against taking the economy off its life support, either in terms of government spending or shifts to higher official interest rates. Having seen the dire warning how can Malta stir towards solid reforms in the next budget and start paving the way leading us audaciously towards an eventual recovery.
Recession times make for superior budget measures finely tuned to the realities of our limited resources. Take the recent controversy about the COLA adjustment which may reach a high of seven euro per week while certain employers have vociferously opposed it this time around saying if implemented, 20 per cent of the firms will start announcing layoffs.
But with the increased costs of gas, fuel, electricity, water road licenses and back-to-school kits being all hiked on the average worker, he demands an adequate compensation. In all fairness, the COLA mechanism is a law agreed by all stakeholders and Finance Minister Tonio Fenech told The Times last week that the COLA mechanism brought industrial stability.
The MEA reiterated it wanted to bear only a part of the COLA adjustment with the balance paid by the government. So recession is the operative word here. It is certainly a testing time for the government to be proactive on solving unemployment which may increment. A recession has crept in silently perhaps unannounced yet it is relentlessly affecting all sectors of the community. Solutions are easy to propose but hard to implement.
Some say that the government first needs to grasp the nettle and immediately trim the bureaucracy overload, which continues to stifle the productive sectors. Secondly, while the sun shined, the banks basked in the bonanza and milked dry the sacred cow by maximising their margins. It is the right time in the next budget that steps are taken to issue directives to banks to follow ECB rulings reflecting lower rates.
At the same time we need to redirect millions in State expenditure which are currently not productive and channel them into marketing campaigns to maximise our potential in areas such as financial services, ICT, attracting high net – worth individuals and energising our incentive legislation within the norms of E.U parameters.
Any scheme announced in the 2010 budget must have a hands-on approach to be executed within the timeframes announced and not left to be carried forward to tomorrow for posterity.
The can-do approach is a sine qua none now that the recession has been officially confirmed by the National Statistics office. During a recession, we can learn from others who were there before us, while taking swift remedies to reform our infrastructure. Perhaps there is an air of muted expectation this year oozing out of that magic budget box. Let us all be ready to hail the genie out of that box.

George Mangion
Partner at PKF – an audit and business advisory firm


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09 September 2009


Malta Today


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