Pent-up demand can drive Malta’s economic recovery

As restrictions on Maltese businesses are gradually lifted, there are good reasons to be optimistic about a strong economic recovery for the second half of the year. 

Following weeks of very low economic activity brought about by the health-imposed measures, Maltese businesses are well placed to benefit from what economists describe as pent-up demand. In layman’s terms, pent-up demand is about the willingness of people to start spending again following months in which they could not do so. It follows that as consumption is restored, the economy will start recovering and wealth will be created again.

Cash + Confidence = Consumption

Consumption by locals and spending by inbound tourists represent the fuel that can drive the economic recovery in the second half of 2021. 

Nevertheless, for spending to take place, two indispensable criteria are required. Firstly there needs to be money to spend and perhaps, more importantly, one needs to be willing to spend that money. In essence, for the economic engine to reignite, one necessitates both the ability and also the real willingness to spend. 

Maltese deposits are up by €1,300 million in a year

Months long restrictions on domestic consumption along with a significantly reduced propensity by Maltese to travel and spend money abroad during the pandemic has seen an unprecedented increase in savings by Maltese residents. 

Central Bank of Malta data shows that by end of February, deposits held by Maltese households increased by almost €1.3 billion over the preceding twelve months. This figure is already impressive as a standalone, but its significance is exacerbated when compared to what kind of annual savings one would expect under normal circumstances. 

Indeed, Maltese families have been registering quite a constant increase in their bank deposits in recent years. However, this yearly increase was always very stable and hovered around €850 million per year. The implication is that the pandemic allowed Maltese households to save almost 50% more compared to what they saved on average in the previous five years. An excess savings of €400 million.

As one would expect, this trend persisted during the recent restrictions on social and business activity. During March 2021 household deposits increased by another €150 million and the total amount of savings by Maltese residents has now reached a record high of €14.6 billion.

The ability to spend is there.

Jobs outlook and health-related factors are crucial for the restoration of confidence

Irrespective of the extra savings held in Maltese bank accounts, however, for spending to take place today, people will need to have the reassurance that they will not need to resort to that money tomorrow. 

The jobs outlook plays an important role in this respect as people will be only comfortable to spend some of their savings if they are confident about their ability to keep receiving income in the foreseeable future. Quite often the source of such income is represented by salaries or proceeds from rental and business income itself. 

During the pandemic, the Maltese labour market was effectively shielded from the real risk of redundancies. The ongoing wage support scheme was crucial to safeguarding job retention and recent announcements made ensuring the retention of this support till the end of the year provides a strong element of visibility for employers and employees in the months to come.

Furthermore, following months of social restrictions, people also need to build confidence in actually being able to get out of their homes and enjoy life without the risk of serious health implications from the possibility of contracting the virus. 

In this context, the Maltese economic recovery is poised to benefit strongly from a very low level of unemployment blended with the fact that ours will be the first European country to achieve herd immunity.

These two factors will support the willingness to spend in the months to come.

Government policy and Tourism 

In the short term government policy needs to be directed towards stimulating domestic spending whilst ensuring a healthy level of inbound tourism. The strong economic position with which Malta faced the pandemic allows the Maltese Government to do both despite on top of the unprecedented level of government spending in the last twelve months. The consumption voucher scheme will create a strong multiplier effect and will be an important tool to stimulate local consumption and unlock the high level of saved earning held in Maltese banks.

Objectively, however, given the small size of our internal market, we cannot realistically aspire for a solid economic recovery without ensuring that Malta is promoted as a safe destination for foreign tourists. 

Not making it to the UK green list is undoubtedly a blow to the expectations of a country that has very successfully managed the pandemic in recent months. However sad, the economic impact of this false start will be recouped once Malta makes it to the revised list in three weeks. This would allow the first UK tourists to start arriving by end of June whilst the domestic market will be able to provide adequate demand to most of the sector in the meantime.

The major risk to this outlook: Ourselves

As business activity resumes following weeks of restraints, people can easily get caught into a frenzy and trick themselves into thinking that the pandemic is behind us. Herd immunity will reduce risks substantially, but the moment airports will start reopening on a global level, variants will travel faster than they have done in recent months and we will inevitably need to manage these risks.

Strict protocols at entry points need to be ensured and the local authorities need to be draconian in ensuring enforcement of health-imposed rules. Businesses need to understand that rules are there to preserve their long-term survival in a world which has changed in such a way that a small temporary spike in infection rates could ruin the livelihoods of many who will simply not survive another lockdown. 

 

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