The signs bode well

The COVID-19 pandemic continues to pose extraordinary challenges. Periodic waves of new infections have afflicted economies everywhere. Vaccination, a game changer, is under way but the pace of progress is still moderate and varies significantly across countries, with big lags in several EU states.

After the historic fall in activity recorded in the first part of 2020 and the rebound in the summer, the EU economy suffered another setback in late 2020 as countries imposed a new round of containment measures, with the Oxford Government Response Index showing a stringency of 72%. With output falling again in the last quarter of 2020, the EU was pushed back into recession. GDP in 2020 fell by 6.6% in the Eurozone.

However, the decline in activity was far milder than expected. Firms and households adapted better to the constraints of the pandemic environment, global growth and trade did not collapse, while continued strong policy support helped economic agents cope with the economic challenges.

The exceptional policy response helped cushion the global economy. As a result, world economic activity contracted by 5.2% in 2020, 1.8% points less than forecast in the October’s World Economic Outlook (OECD). Job retention schemes, deployed by about 40 European countries, protected 68 million jobs at their peak. Corporate sector policies (including guaranteed credit to firms, debt moratoria, and job retention schemes) provided lifelines to firms, with the number of corporate bankruptcies declining in 2020.

Thanks to the tempestuous and effective measures introduced by the Maltese Government, the economic fundamentals in Malta remained promising. The labour market is still robust and the unemployment rate has decreased, thanks to ongoing Malta Enterprise schemes. From a peak of 4.6% in April 2020, the unemployment rate declined to 4.1% in April, and is only marginally higher than it was before the pandemic struck. According to the Labour Force Survey, the number of jobs in the last quarter of 2020 was only 0.8% lower than in the last quarter of 2019, while economically-inactive persons were just 0.2% higher.

Thanks to the tempestuous and effective measures introduced by the Maltese Government, the economic fundamentals in Malta remained promising.

The level of consumers’ disposable income is, therefore, largely intact – a precondition for a recovery once the restrictions are lifted. According to the ĠEMMA Pulse Survey on Household Money Management (April), 86% of respondents said that they have control on their financial situation. This confirms that the pandemic has not destroyed peoples’ livelihood and outlook, the implication being that people will be more inclined to spend once life returns to a more normal mode.

Consumer spending, which fell by a whopping 21% in April/May last year, is still in negative territory, with a year-on-year drop of some 4% in the first quarter of this year. But consumers’ willingness to entertain major purchases is recovering, with 32% saying that now is the right time to do so, compared to just 17% in April last year. On the whole, however, consumers are still in a savings mode and goading them back to the stores will take some more time.

A second negative spot from an economic perspective was industrial production. In the first quarter of this year, industrial production was still below last year’s level, with reductions of 7.6 p.p. in January, 11.6 p.p. in February, and 2.3 p.p. in March. All four categories of production registered a lower index, with drops of 3.8 p.p. in intermediate goods, 8.7 p.p. in capital goods, and 33.3 p.p. in energy in the first quarter of this year compared to the same quarter last year. Only consumer goods production was almost static, with a mere 0.6 p.p. reduction. Again, though, the falls appear to be tapering off.

Of course, the major hit to the economy was in the tourism sector. Tourist arrivals and expenditure collapsed by 76% and 79% respectively in 2020, though the decline was noticeably less sharp less sharp in March this year.

Despite the ongoing health crisis and lockdowns, business optimism in Europe is high and widespread. The results of the latest Deloitte’s European CFO survey, a survey of CFOs of more than 1,500 large companies, show that business sentiment has turned substantially. Business sentiment in the Eurozone is close to its highs since 2017 and a majority of CFOs expect revenues to rise for the next 12 months.

According to the Central Bank of Malta, year-on-year outturns are still negative in many variables. Overall business conditions continue to be worse than those observed during 2009, highlighting the severity of the pandemic relative to the Global Financial Crisis, although there has been a marked improvement in recent months.

In April business conditions in Malta improved significantly with respect to the previous month. In fact, the Bank’s BCI improved to -1.9 from its revised value of -2.4 for March and -2.7 in March 2020. This reflects a surge in economic sentiment, as well as an improvement in selected government revenue items. Notwithstanding this improvement, the index continues to reflect the weak economic environment triggered by COVID-19. 

As far as economic sentiment is concerned, from a low of 69.4% in May 2020, the Economic Sentiment Index in the EU has now climbed back to 109.4%. Malta’s ESI has performed even better, rising from a low of 66.9% a year ago to 117.3% in April 2021. In contrast, Cyprus’s index improved by a mere 13%.

There are good reasons to be optimistic that Malta’s economic performance could improve and that growth could return in the second quarter and accelerate in the third. First, the economic fundamentals are intact, and second, scarring in the economy, in terms of long-term consequences of the crisis, is limited.

As a consequence, a consumer-led recovery, on the back of accumulated savings during the crisis, is likely to develop. Depending on how much of this money is spent and how quickly, a fast rebound might emerge in the second half of the year. The release of a second round of consumer vouchers is welcome at this stage.

As the rebound gains momentum, the focus of economic policy will have to shift from protecting companies and jobs to paving the way for a smooth, sustained, and sustainable, recovery. The Union’s Recovery and Resilience Facility (RRF) offers a unique opportunity in this respect that cannot be missed. Its utilisation is essential to ensure that Malta returns to its pre-pandemic level of GDP by the first quarter of 2022.  

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