Across the globe, economists are forecasting very substantial rates of GDP growth. However, they are also sounding some important words of warning. If one’s economy dropped sharply in 2020, a high rate of growth in 2021 does not necessarily mean that things are back to normal. To give a blunt example, if a firm’s output fell from €20 million in 2019 to €10 million by 2020, or by 50%, if in 2021 its output rises by 50%, it would still be at €15 million, or €5 million lower than its 2019 output.
Besides this issue with how to interpret economic data in periods of high fluctuation, however this is a more fundamental issue known in economic literature as “scarring”. Both the ECB and the IMF have shone a light on this challenge. As a result of recessions, “businesses shut down, investment spending is cut, and people out of work can lose skills and motivation”. Moreover, literature shows that when economic downturns affect the financial sector, the long-term impact can be quite significant. Banks withdraw to “lick their wounds”, leading to lower access to finance, hampering investment and innovation.
The 2008 recession in Malta was relatively short and shallow when one looks at GDP numbers. Already by 2010 GDP had bounced back and exceeded its 2008 level. Yet there had been long-term damage. The number of registered unemployed which in mid-2008 had settled below 6,000, had jumped to 7,500 a year after. In March 2013 it was still 7,350, and it was back below 6,000 only in mid-2015. Manufacturing’s value added in real terms remained below its 2008 level till 2017. The non-performing loans of Malta’s core banks were below 5% in mid-2008, but by 2013 they were nearly double that rate. It took until 2017 for the ratio to fall back to its mid-2008 level. The high point of the European Commission’s Economic Sentiment Indicator for Malta reached in early 2008 was unparalleled till end 2017.
Given that the GDP impact exerted by the pandemic was ten times that exerted by the 2008 crisis, one would not be blamed as to be somewhat worried about scarring effects. It will inevitably be a question that policymakers, both local and international, will be assessing.
The first signs are however very promising. Let us start with the labour market. The number of those registering for work peaked at over 4,400 in the first week of June 2020. This was two and a half times the number at the start of the pandemic. However as from the week after Government launched the economic regeneration plan, every week the number of those registering fell. We are now at a figure which is slightly above 2,000. When one considers that the historical average is 6,000, the current amount of registered unemployed indicates that rather than worrying about unemployment, policymakers may need to start worrying about labour shortages.
Economic sentiment had collapsed in the first months of the pandemic. From an index value of 105 after the 2020 budget, the Commission’s Economic Sentiment Index for Malta had crashed to a historical low of 63 in April 2020, one of the largest drops across the EU. Yet a year later, the index now stands at 117.3, its best value since 2018.
Even the financial sector shows very encouraging signals. The ratio of non-performing loans at the end of 2020 was 3.7%, up from 3.2% at the end of 2019. The historical average of this ratio is nearly double that. Even five years ago, the ratio was close to 7%. The most recent Central Bank of Malta Economic Update indicates that at the end of March there were €417 million in loans that were still benefitting from the moratoria announced at the start of the pandemic. As can be seen from the Table, at its peak there were €1,927 million loans under this scheme, or nearly 5 times as much. In sectors such as transportation, which in August 2020 was the second-most sector dependent on this assistance, with nearly 40% of all loans unable to be serviced, we are now down to 1%. In real estate, from 34% we are down to 6%. In wholesale and retail dependence on moratoria is down to 3%, from 23% back in August. Amongst households only around 700 are still asking for this benefit, down from a peak of over 7,200. Even in the accommodation and food services sector, the need for this assistance has more than halved.
Despite the pandemic in 2020 the number of limited liability companies still rose by 717. The resilience of Malta’s businesses is attested by the fact that a tenth of this increase was in the wholesale and retail, transportation and accommodation and food services sectors, those sectors most hit by the pandemic.
All this suggests that the Government’s attempt to protect Malta’s productive capacity has succeeded and that with our business engine intact, our economic rebound will not falter.