All is well now. Or is it?
Finance Minister Tonio Fenech told Parliament last Wednesday that “Malta had already come out of recession and the first quarter had shown an economic growth of 3.4 per cent”. The minister was quoting the National Statistics Office’s press release of June 9, announcing provisional estimates for gross domestic product for the first quarter this year. While this is certainly positive news, we need to keep our feet firmly on the ground.
The NSO release provides a helpful table showing quarterly real GDP growth for a number of years. Looked at in this perspective, we observe that, whereas in the first quarter of 2007 the Maltese economy grew in real terms by 4.6 per cent, it grew by only 2.1 in the same quarter of 2008 and then shrank by 2.0 per cent in the same period of 2009. So the 3.4 per cent achieved in first quarter 2010 is the first positive year-on-year first quarter result after the negative growth of first quarter 2009. If we look at results for all quarters of 2009 we observe that the Maltese economy shrank by 2.0 per cent in the first quarter over the same period in 2008, by 3.4 in the second quarter, by a further 2.0 in the third and, finally, emerged into positive growth with a modest but significant 1.3 per cent in the fourth quarter.
From this point of view, the result of the first quarter 2010 is the second positive. Now look at annual GDP growth at constant prices as reported in the same NSO release. We grew by 3.9 per cent in 1995, by 3.6 in 1996, by 3.8 in 2007 and then slipped down to only 1.7 in 2008. In 2009, then, we actually shrunk (negative growth) by 1.5 per cent. When we compare these results with the series provided in the International Monetary Fund’s World Economic Outlook 2010, these agree with the NSO’s results for 2005 to 2007 but give different results for 2008 (2.1) and 2009 (-1.9). There are certainly technical reasons for this. In any case, I am not referring to them to point out the discrepancy.
The IMF series is interesting because it provides forecasts for Malta’s annual GDP growth. Thus, it forecasts a 0.5 per growth for the whole of 2010, going up to 1.5 in 2011 while for 2012 and 2013 it indicates 2.5 and 2.6 respectively. Certainly, all things being equal, it does not indicate growth rates above three per cent in the foreseeable future. There are two points that suggest that we should keep our feet solidly planted on the ground. Firstly, regarding the tired old question of what is a recession and, following from it, what does it mean to come out of one.
If one sticks to Shiskin’s “two down quarters of GDP” rule of the thumb for defining a recession (actually it was only one of a number of rules), then there is a lot to say for a “two up quarters of GDP” rule for declaring that a country is out of recession. From this restricted point of view, first quarter 2010 results should be interpreted very cautiously. Serious observers prefer to look at a broader set of indicators determining the beginning and the end of a recession but even the more simplistic of rules of the thumb suggests we do not get overexcited.
Which is not to say – I repeat – that results so far are not encouraging. Employees who have been told that their difficulty in making ends meet is due exclusively to the global recession and who were strongly advised by this government to suffer in silence can now begin to whimper. Or not?
The second and more substantial point is that made in the IMF’s WEO of April 2010. We are warned that the “global recovery is proceeding … tepidly in many advanced economies”. Now bear in mind that we export our goods and services precisely to and get most of our tourists from these “advanced economies”. Moreover, “risks to global financial stability have eased but stability is not yet assured”. Further: “The outlook for activity remains unusually uncertain and downside risks stemming from fiscal fragilities have come to the fore. Moreover, sovereign risks in advanced economies could undermine financial stability gains and extend the crisis. The rapid increase in public debt and deterioration of fiscal balance sheets could be transmitted back to banking systems or across borders.”
The update to the WEO of July 7 warns that “downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area”. The latest Central Bank of Malta Quarterly Report – the same one that announces that sentiment among manufacturing firms and consumers has deteriorated in first quarter 2010 – adds that, in these circumstances, “broader structural reforms remain necessary to ensure that the Maltese economy safeguards its external competitiveness, especially since key trading partners are engaged in radical adjustments of their domestic cost structures”.
The point is that Minister Fenech should avoid giving the impression that all is well now. It isn’t and not only because of external conditions. A wiser minister would factor in other elements including his own shortcomings. And his Prime Minister’s. Now more than ever, the more sober observers realise the political cost to the government of having “promoted” John Dalli to Brussels.
This article appeared on Dr Vella’s regular column on The Times of Malta on June 19, 2010. The original may be accessed at http://www.timesofmalta.com/articles/view/20100719/opinion/all-is-well-now-or-is-it