Premature cries of pleasure?
I have already commented on Finance Minister Tonio Fenech’s mid-July declaration that Malta had already come out of recession (All Is Well Now. Or Is It?, July 19). The minister, to be fair, had merely echoed the Prime Minister’s smug mid-March assertion that the country was already then “out of recession” (The Times, March 12). I submitted that Mr Fenech ought to be more cautious and explained why. I did not refer to Lawrence Gonzi’s earlier statement but it follows that if it was far too early for the Finance Minister to pronounce us safely out of the tunnel in July, then it was all the more less cautious of the Prime Minister to do so in March.
Nobody has come forward to defend Mr Fenech – nor, for that matter, Dr Gonzi – and to argue that all is really and irreversibly well. On the contrary, the experienced Karmenu Farrugia, speaking to another English language newspaper just over a week ago, opined that “we are not out of it (the recession) yet”. Speaking to the same newspaper, Gordon Cordina observed that “growth is not as yet widespread across all sectors of the economy” and Michael Pace-Ross, director general at the National Statistics Office, warned that “economic uncertainty persists in some developed economies on which Malta is dependent”.
Mr Pace-Ross did well to remind the minister that we do not live in a glass bowl and that we depend on major economies.
After the US Commerce Department’s announcement last week that US economic growth slowed between April and June, with GDP growing by an annualised rate of 2.4 per cent in comparison with an annual rate of 3.7 per cent in the previous quarter, the minister should be even more cautious. The US is the fourth most important market for goods produced in Malta, after Germany, Singapore and France.
In 2009, the value of exports to the US exceeded €152 million and that was a bad year when compared to the €183 million of 2008. Growing fears about the strength of the US economic recovery with unemployment standing at 9.5 per cent are not good news for us. Our exports to the US tend to be industrial products that are then incorporated into finished goods produced by US workers and bought by US consumers. High unemployment in the US and – as has also been confirmed – a fall in sales of goods such as cars are bad news for us.
In these circumstances, we are justified taking more seriously what the US Federal Reserve stated last week than what our own Minister of Finance and the Prime Minister say. The Fed warned that “the pace of recovery in output and employment has slowed in recent months”. No wonder that already in July, Fed chairman Ben Bernanke spoke of an “unusually uncertain” recovery. The International Monteary Fund even suggested that the US might have to increase its stimulus spending to support the recovery and warned that “the outlook remains uncertain”.
Last week, we also had bad news from Britain. The Bank of England’s inflation report disclosed that the UK economy will grow by about three per cent year on year in the second half of 2011. That’s half a percentage point less than the Bank forecast in May. Preparing Britons for slower growth and for inflation significantly higher than what the Bank previously told them, Governor Mervyn King spoke of a “choppy recovery”. The decision in June to increase VAT from 17.5 per cent to 20 per cent will not make Britons – households as well as firms – feel any better.
This is not the first time the Bank has failed to accurately forecast inflation and this is very worrying and not just for Britons. Economists are worried that this might be a signal that the Bank of England (the UK’s Central Bank) may lose control of monetary policy. That would be a prelude to a double-dip recession.
Now, why should this worry us too and discourage our responsible statesmen from premature cries of pleasure?
There are at least two reasons.
First, Britain is our second most important tourism market. The average number of arrivals from the UK between 2007 and 2009 stood at about 450,700. High inflation and a choppy recovery in Britain – to say nothing of a recessionary double-dip – will mean less tourists dipping in our own sea.
Second, Britain is our fifth most important export market. In 2009, the value of exports to the UK stood at €96.5 million and that was a bad year (they amounted to €167 million 2008). A choppy recovery in Britain is bad news for export industries in Malta.
We don’t often think of Japan when we discuss Malta’s recovery prospects. That’s short sighted. In 2009, Japan was our seventh most important export market absorbing over €58 million (a very bad year when compared to the almost €158 million of 2008).
News that economic expansion is poised to slow down in Japan is not good news for us. On the other hand, recovery prospects in Germany, a vital trade partner and tourist market, are exceptionally good but their sustainability depends on demand in the US and China.
It is a complex and uncertain world. One more reason why the minister of finance and his boss ought to measure their words.
This article appeared in Dr Vella regular column on The Times of Malta. The original may be accessed on http://www.timesofmalta.com/articles/view/20100816/opinion/premature-cries-of-pleasure