Recession? Banish the thought

The question remains whether the positives will be strong enough to convince people that the worst is over.

Eurozone manufacturers ended 2023 on the wrong foot after factory activity contracted for the 18th consecutive month.  Though Standards & Poor’s manufacturing Purchasing Managers’ Index (PMI) edged up slightly to 44.4 in December, it remained doggedly below the 50-mark separating expansion from contraction.

The bloc’s economy shrank by 0.1% in the third quarter, official data has shown, so a second quarter of contraction would meet the traditional definition of recession.  According to economist Cyrus de la Rubia, the PMI index paints a bleak picture for the eurozone and would mean that it entered a recession in the third quarter, banishing any thought of any imminent strong bounce-back in the economy.

Mind you, not all economists agree that two consecutive quarters of economic decline equate to a recession. For example, the National Bureau of Economic Research (NBER) in the US has a more comprehensive definition: a recession entails “a considerable decline in economic growth which is prevalent in all or most sectors of the economy and spans over the course of a few months.”  This is something that consumers and businesses in Europe can easily relate to.

Another indicator of economic health is the lending activity of banks.  If they disburse more loans, it means that people are confident in the economic prospects of the country and therefore engaging in more business activity. A falling number of loans indicates otherwise.  In fact, loans to businesses were 0.3% lower in October 2023 than in the same month in 2022  ̶  the first annual fall since 2015. Similarly, the rising loan default ratio suggests that the stress of loan defaults is unfortunately rising.

Reuters says that, though the ongoing decline in new orders eased moderately, the sluggishness of new orders echoes the general gloom.  Some of December’s activity was generated by completion of old orders, but poor work backlogs led manufacturers to cut headcount for a seventh consecutive month.

So far, it looks like the eurozone will avoid a deep contraction that could severely damages firms, households and banks.  On the other hand, growth is hovering around zero with little out there to fuel a meaningful recovery.  Economic headwinds are so strong that 2024 will also be challenging and it will be a struggle to manage more than a 1% rebound.

Rising rents, mortgages, and energy prices have created difficult economic conditions with wages hardly meeting outgoing essentials.  These come on top of deep structural problems which will ensure that Europe continues trailing most other big economic areas for years to come.

What’s in store

With the recent geopolitical tensions, energy prices are expected to remain elevated well into next year. While inflation has tamed a bit it is still way above the five-year moving averages. Meanwhile, rising interest rates add to the worries, considering that, according to various estimates by banks, higher rates can shave off 1% of gross domestic product (GDP) from the eurozone.

The IMF’s latest economic update anticipates a slight recovery in the latter part of 2024.  This, however, is based on certain assumptions, the most important one being that oil and gas prices will remain stable.  With some luck, the eurozone might be able to avert a full-blown recession, wallowing instead in a “rolling recession”.

What does this mean for Malta? 

Well, all the forecasts show that Malta is set to enjoy the strongest economic growth among EU countries this year, even though it will moderate from 2023.  According to the autumn forecast of the European Commission, the island’s GDP growth is expected to reach 4.0% this year, down from 6.9% in 2022 but the same as last year. The recent Budget projected growth of 4.2%. 

Private consumption has decelerated in the wake of the 5.7% inflation in 2023.  The Commission has observed that, while energy prices are set to remain unchanged until 2025 due to government measures, inflation will still reach 3.3% this year, though it will then moderate to 3.3% in 2024 and 3.1% in 2025.

A high pace of employment and population growth is expected to continue, a key factor driving the outlook for consumption despite the expected weak recovery in real wages.  After a 6.2% rise in 2022, employment continue to grow very strongly in the first half of 2023. During the third quarter of 2023, the Labour Force Survey estimates that total number of persons in employment was 301,441  ̶  5.9 per cent higher when compared to the previous year.

This increase was fuelled by strong labour demand which increased across all sectors of the economy, both public and private, and was especially strong in tourism and administrative services. In 2024, the labour force is set to rise at a robust pace in line with population growth as the country continues to attract foreign workers.  Meanwhile, the unemployment rate fell around 2.7% in 2023.

Not all indicators are buoyant.  Economic sentiment in Malta in November dipped below its long-term average of 100, dropping from a score of 102.8 in October to just 96.4, though identical to November 2022, according to the latest economic update published by the Central Bank of Malta. However, Malta still scores higher than the Eurozone average of 93.8.

In contrast, confidence in construction increased notably. This marked the first time since June that the construction sector did not register a negative score, rising from -11.9 in November to 2.8 a month later. Nevertheless, this remains lower than the scores registered in 2021 and 2022.

Growth of Malta’s real GDP (compared to previous year)

The Services Indicator did not perform that well, pointing to shrinking confidence in the services and retail sectors, both of which registered significantly lower scores than in previous months. Confidence scores across many of the other sectors tended to fluctuate markedly from one month to the next. However, consumer confidence scores bucked this trend, with each month over the past year scoring negatively.

In practice, the Central Bank concludes that consumers have held “a fairly downbeat view of their financial situation over the past twelve months and are not expecting significant improvements over the next year.” 

Uncertainty is decreasing

In spite of this, the economic update also reveals that uncertainty across several economic sectors is decreasing, suggesting that Maltese businesses are now better placed to predict their future financial situation.  In fact, the Economic Uncertainty Indicator score shrunk from 26.9 in October to 24.1 a month later. Uncertainty dipped across most economic sectors measured although, once again, the construction sector scored most strongly.

Inflation remains the proverbial bull in the china shop. According to the National Statistics Office, the annual rate of inflation last month as measured by the Harmonised Index of Consumer Prices (HICP) was 3.9 per cent, falling under 4% for the first time in 2023. However, this wasn’t true of all items, with food inflation increasing to 8.2% in December.


A string of opinion polls has repeatedly put inflation at the top of people’s worries, which explains the pummelling the government has taken.  People had become used to extremely low inflation rates averaging around 2.0% between 1990 and 2020.  The punishing rate of around 5.7% over the last two years has battered family finances.  It seems that the €772m spent on energy and food subsidies have done little to comfort the public.

The government has not yielded to pressure from the European Commission and the IMF to withdraw the subsidies and will continue spending around €350m this year.  With inflation forecast to go down to some 3.0% this year, one would think that the government will have whipped the problem.  Alas, the introduction of the Emissions Trading Scheme (ETS) in January will set us back considerably.

Negative effects of the EU’s carbon tax

I have not seen a cost-benefit analysis of the effects of the carbon tax on Malta’s economy.  This is incredible, considering the extent of the impact on our country.  It could well be that the government has done one and is scared stiff of publishing it.  So, at the moment, we can only rely on partial analysis. 

For example, Malta Today reported that price increases for transporting containers between Malta and other Italian ports will range from €25 to €92 per container, though it is not clear whether this increase reflects just the 40% ETS coverage in 2024 or its full impact of 100% by 2026.  The Malta Maritime Forum has estimated the cost differential between non-ETS/non-EU Mediterranean ports and ETS/EU ones at €34m per year, which will surely be borne by consumers.

Express Trailers  ̶  one of the largest logistics firms in Malta  ̶  has already said it will increase prices by an unspecified amount. Additional impacts will be longer transit time for both imports and exports if goods do not arrive or depart directly in Malta, the potential loss of some 150 ports which are currently served through the Freeport, as well as the claimed potential loss of €140m in revenue by the Freeport.

None of these figures have been disputed by the government. Economy Minister Silvio Schembri dissembled the whole issue when, replying to Opposition concerns, he praised Malta’s economic performance.  All well and good, but can the public and well-meaning economists, if not the Opposition, get a straight answer to a straight question?

Debt and deficit

The Budget, as approved by the European Commission, shows a fiscal deficit of 4.5% this year  ̶ declining by half a percentage point, though still high by historical standards.  We will still have a 3.0% deficit by 2027  ̶  a far cry from the surplus registered in 2017.  Meanwhile, the public debt ratio is faring somewhat better than expected: it is estimated to have been around 53% versus the 59% projection.  The forecast sees the ratio increase to 55.8% in 2024 and 57.2% in 2025, though it could well be that strong economic growth might yet temper the negative trend.   In the government’s defence, the ratio is still lower than the 60% EU mark and great by the eurozone average of 90%.

The million dollar question

The question remains whether the positives will be strong enough to convince people that the worst is over.  It’s the million dollar question.  My personal feeling is that three years to the next general election should be enough time for the government to recover, but as we all know even one day is too long in politics.    

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