Malta: Economic Developments

Last Updated: 11 January 2013
Article by Steve Stivala

Worldwide economic growth seems to be characterised by a two-speed recovery. However, the weak recovery in Europe could face an engine stall if the Euro crisis is not addressed.

In last year's publication, we provided a brief commentary on economic growth and stressed the importance of having consistent and sustainable growth, with special focus on enhancing the supply-side capabilities and potential of the Maltese economy.

On the international scene, world economic growth in the latter half of 2011 was characterised by a tepid unbalanced recovery, which was relatively weaker than the recovery experienced in the first six months of 2011. In particular, supply side shocks in the Far East (Japanese natural disasters), high commodity prices and the European sovereign debt crisis have contributed to subdued economic growth rates in most of the developed countries. On the other hand, growth in emerging countries continues to be strong, although such economies are not entirely immune to weaker external demand, financial uncertainty and sharp shifts in risk appetite, exacerbated by tighter credit and purposeful prudent public spending. Indeed, by Far East standards, China's real growth rate has fallen to a 'meagre' 7.8% while India has decelerated to 4.8%, which is relatively modest compared to the double digit growth experienced in 2010. By contrast, developed countries would only dream to achieve such growth rates in the current dismal scenario.

With respect to the EU, the muted overall growth seems to be characterised by a multi-speed recovery, which poses a great challenge to the European Central Bank in trying to normalise interest rates which have been nominally close to zero for some time. Furthermore, according to the World Economic Outlook, Europe is experiencing so-called growth brakes. Specifically, fiscal consolidation as practiced by major EU economies to manage public debt is denting recovery (see section on public debt - pg 16), whilst bank deleveraging is hurting credit expansion. In dealing with the crisis, policymakers are facing a daunting task in balancing the adverse short run effects with the potential long run benefits. Needless to say, the risk of economic world-wide contagion is ever-present, with the increase in risk aversion in the financial economy, and the slowdown in aggregate demand in Europe set to potentially affect growth across the Atlantic. In fact, according to the latest World Economic Outlook, economic growth is now too low to make a significant impact, especially on employment. In addition, forecasts for 2013 have been slashed from 2% and 6% to 1.5% and 5.6% for advanced economies and emerging economies respectively. The major contributors to such pessimistic forecasts include fiscal consolidation and austerity measures, weaker banks and tighter credit conditions, and a general aura of uncertainty. On the positive side, an accomodative monetary policy (quantitative easing in the U.K. and Outright Monetary Transations in the Eurozone) can aid to mitigate some of these pressures.

If we continue to narrow our focus to the situation in Malta, we notice that economic growth rates continue to outpace those of EU27 and EA17. For 2011, real economic growth in Malta reached 2.1%, compared to 1.5% for both EU27 and EA17. Breaking down the 2.1% growth rate into quarterly growth rates, it is apparent that there is a slowdown which results in negative economic growth in the last quarter of 2011 (-0.5%). This was sustained in the first quarter of 2012 with a growth rate of -1.2%, resulting in Malta officially entering a recession. Despite the negative growth, Eurostat still forecasts a positive annual growth rate for 2012 of 1.2% (as opposed to zero growth for EU27). Indeed, this is set to become a reality as Malta registered positive real growth in the second quarter of 2012, with an increase in real GDP of 0.9%. Whilst this means that we are officially out of the reccession, it does not categorically imply that Malta is safe from further economic dips. Rather, this merely provides an indication that, if sustainable, we are probably heading in the right direction.

In the last publication, we also noted that EU convergence was happening, albeit at a modest pace. In particular, latest data shows that Maltese GDP per capita (in PPS) increased slightly from 82% of the EU27 in 2010, to 83% in 2011. This indicates that Maltese economic growth has outpaced the Community average. Whilst this is positive news, it comes as a mixed blessing in the sense that Malta would no longer qualify for Objective 1 (Convergence objective) status and thus lose out on EU structural funds. Furthermore, since the same convergence threshold (which is 75% of the EU27 average) is linked to eligibility for Regional state aid, failing to satisfy such a condition would potentially lead to the cessation of various business incentives and schemes presently offered by the state. However, negotiations with the EU Commission are currently underway to resolve this issue.

Recession: What does it mean for Malta?

As is widely known, the economy goes through what is called a business cycle, which is characterised by peaks, recessions, troughs and expansions. Although there are many different interpretations of recession, in the EU, the official definition requires two consecutive quarters of negative economic growth. This means that in real terms, GDP would have contracted from the previous period for two consecutive quarters, as was the scenario in Malta during the two quarters ending on March 2012. On the other hand, in the U.S. there is no rule of thumb to define a recession, as the chronology of the business cycle is determined by the National Bureau of Economic Research, which uses a subjective definition. This approach is more flexible as it allows for the possibility that a recessionary period can also have one-off quarters with positive growth. Furthermore, other important variables are looked at, such as employment and income, apart from real GDP.

This goes to show that, although an official recession is probably always bad news, it could be that statistics overstate the economic reality, especially in small countries such as Malta where shocks are felt more strongly. Evidently, the drop in real GDP over the latest two quarters was mainly driven by a drop in exports from a major Malta-based manufacturer, and higher imported energy prices. On the other hand, Government final consumption expenditure continued to increase deep into 2011, potentially softening the extent of the recession. Despite this, Malta still enjoys one of the lowest unemployment rates in the EU (6% compared to 11.1% in the Eurozone – source Eurostat data for April 2012).

This article was originally published in Insight 2012. Please click here to view the original document.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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