News | Wednesday, 22 April 2009

The GDP slide and beyond

Speaking during the launch of Central Bank of Malta’s annual report last Thursday week, Central Bank of Malta (CBM) Governor Michael C. Bonello downgraded the bank’s GDP forecast for 2009 to 0.5-1.1 per cent from 1.6-1.7 per cent in February. Business Today spoke to four experts –John A Consiglio, Lawrence Zammit, veteran economist Karm Farrugia and Labour candidate for the EP elections Edward Scicluna – about the CBM’s latest GDP revision and its implications about the Government’s own forecasts for GDP and budget deficit for 2009. Report by CHARLOT ZAHRA

Edward Scicluna : “I am not amused by this GDP forecast charade”
I am not in the least amused by this GDP forecast charade both with regards to the Central Bank’s own timing and more so with regards to the Ministry of Finance’s own estimates.
The latter has over the last three years over-estimated consistently both the GDP growth and government revenues, thus minimising the resulting deficit ratios.
This reached its peak last year when during the Budget speech in November the Minister forecasted a 3 per cent economic growth for 2008 and a 2.5 per cent figure for 2009, notwithstanding the fact that the economy had been experiencing a ten-month consistent fall in external revenues caused by falling exports and tourist arrivals. So much so that the EU Commission’s own estimate for 2009 was merely 0.7 per cent.
To date no revision has been announced by the Ministry of Finance, giving the impression that its policy measures and public finance estimates are still on track.
The Central Bank of Malta announced a revised forecast of under 2 per cent (presumably 1.9 per cent) in December of last year. Again this contrasted sharply with the EU model estimates given a month later which used the same set of local economic data.
I am sure that nobody is impressed that when our latest local recession has entered our history books, the Central Bank comes forward with a revision which aligns itself in some ways with the EU’s forecast made four or five months ago.
What are we expected to say: Eureka? Forecasts are about the near or distant future not the past. There are enough smart and qualified officials within the CBM who could handle an econometric model with ease and make reasonable estimates for the next two or three quarters.
To complicate matters public finance data have been published for the first two months of the year while we are still awaiting the public finance situation as at the end of December of last year.
I can assure you it is not easy keeping track of the Maltese economy with these overdue snippets of information and estimates which seem to be taken off the cuff and meant only to impress.

John A Consiglio: “I have been proven right”

Of course I agree with the CBM Governor’s decision to revise the GDP forecast for 2009, and, to boot, without me having at my disposal the extent, and quality, of economic data that his excellently staffed Economics and Research Department has, I feel somewhat smug at the fact that his revised forecast of GDP growth for 2009 – now down to 0.5 to 1.1 per cent – is at a range quite similar to the one I had suggested would be the case in my answer to this paper on the same subject a few weeks ago, when I had said that I would be a happy man if at the end of this year we would factually register a 1.5 per cent growth in our GDP.
There are, generally speaking, two types of economic data. That which necessarily comes in on an a posteriori basis, and the problems there are of course its extent and accuracy of coverage, and its useful timeliness.
And there is the type of data which is extrapolated making use of econometric and economic modelling techniques. Taking these elements into consideration authorities, including the CBM, need and should be allowed as much liberty as possible as regards to when they make their announcements of forecasts, and also revisions thereof.
This time round, the extent of the revision – from a range of 1.6 to 1.7 per cent, which we were being given up to as recently as six months ago to now the 0.5 to 1.1 per cent – is easily explained.
There is no way that economic predictors can tell the rate at which inter- country, or inter-block, economic effect transmission rates will operate.
Take the travel industry for example: there is no constantly unchanging pattern of travel planning that can be forecasted with precision and encompassing the whole of the industry, particularly its business travel component.
And the same might be said for manufacturing industry, and financial services. So impact effect rates, timewise, will always create problems in any forecasting exercise.
Take, as another example, if at this moment there are various positive signs emerging in the US, with what precision can one say when their positive effect on different other economies, in different parts of the world, will be felt? In this game, time is the tyrannical ruler against whom none of us can do anything.
Given therefore the delayed feeling here of some of the very worrying effects of the international economic recession, it is – and we of course can only say this now, and certainly not at the time when the 2009 Budget Speech was delivered – no longer probable that the Finance Ministry’s forecast then, of a 2.4 per cent GDP growth, will be achieved.
In such circumstances it would probably be quite close to a miracle to achieve that result. But in economics one never really knows. A lower growth rate, or even, conceptually, a negative GDP change from one year to the next, will of course mean less economic activity all round – generally speaking – and for government that then transmits itself into less income by way of taxes (both direct and indirect), social security payments incomes, payments for public services, among other things.
With then government still having to pay unchanged, or possibly even higher, amounts for salaries, social services, debt interest, and what have you, then naturally the government’s budget deficit suffers.
I expect a budget deficit coming close to, or even possibly now again above, the EU required 3 per cent at the end of this year, but then, there again, caution has to be exercised around the question of the date of when the budget speech will usually be delivered, because figures bandied about there will not be covering a full whole year of operations.
And everyone knows well enough how much things change in our economy during the last quarter.
And this is a situation with which most economists I know are not at all happy.
We need to seriously consider resorting to presenting the budget not later than mid-February, so that at least the full whole, and hopefully factual, previous calendar year’s figures be hopefully available for better analysis.

Karm Farrugia : The Governor should have revised “even earlier”

Do you agree with the Central Bank Governor’s decision to revise the GDP forecast for 2009 now or not? Why?
He should have revised even earlier; he is much more updated than anyone else on economic happenings. I am not surprised if it is under his guidance that the EU Commission comes out with its own separate projections.

What is your opinion about the CBM Governor’s revision of the GDP forecast for 2009 from 1.6-1.7 per cent to 0.5-1.1 per cent?
I still believe that we should be happy if we can avoid negative growth throughout the whole of 2009.
The Governor protected himself by adding that “the degree of uncertainty surrounding the projections is exceptionally high and that risks to the GDP are expected to be on the downside” – as if ‘risks’ can ever be otherwise – they would then be ‘prospects’ not risks.

In your view, why was such a wide revision of the GDP forecast for 2009 necessary at this stage?
At the time the 2009 Budget was launched, I stated very emphatically that it was “too optimistic”. Revision at this stage, and not later, dims the artificial brightness thrown on the economy and which is preventing us from appreciating the extent of the downturn which has now inevitably hit us, perhaps more belatedly and less deeply than others but is warning us that it might linger on longer unless we take fiscal measures via public investments.

Do you agree with the extent of the revision of the CBM’s GDP forecast for 2009 or not? Why?
My own forecast would more likely have been +0.5 per cent to -0.5 per cent, depending on what fiscal measures are implemented, since monetary ones are not finding sufficient cooperation from our banks.

How will the CBM’s GDP revision effect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech?
A budget deficit of only 1.7 per cent of GDP is illusory. Even if it were possible it would certainly not be healthy for an economy in recession, particularly since the Government will more likely restrict the Capital Expenditure side of the budget rather than the Recurrent Expenditure part.

What would be a more realistic forecast of the budget deficit for 2009? Why?
A deficit of 4 per cent – and provided we do not adhere so tightly to cash accounting.

Lawrence Zammit: “We are still talking of economic growth in Malta”

Do you agree with the Central Bank Governor’s decision to revise the GDP forecast for 2009 now or not? Why?
The Governor of the Central Bank of Malta must have access to economic data is not in the public domain. So he must have had his own reasons for revising the GDP forecast.
Moreover in the last months, there has also been a revision downwards of the GDP in a number of the world’s leading economies. Thus in an economy that is as open as ours is, we need to take account of the depth of the international recession.

What is your opinion about the CBM Governor’s revision of the GDP forecast for 2009 from 1.6-1.7 per cent to 0.5-1.1 per cent?
I may be the eternal optimist; however do we realise that we are still talking of economic growth in this country while everyone else is talking of a decrease in the GDP?

In your view, why was such a wide revision of the GDP forecast for 2009 necessary at this stage?
I attribute it to the revisions that have been taking place in most other countries. Moreover most businesses in Malta are seeking to make gains in efficiencies to survive and thus this revision downwards is also the result of such a strategy at the level of the individual firm.

Do you agree with the extent of the revision of the CBM’s GDP forecast for 2009 or not? Why?
I am not privy to any economic data that has not been published and so I cannot comment.

Do you think that the GDP forecast for 2009 of 2.4 per cent growth for this year given by Finance Minister Tonio Fenech in the 2009 Budget speech is still tenable or not? Why?
One will need to see three factors before passing judgement. The first is the performance of the large manufacturing firms based here. The second is the performance of the tourism sector. The third is developments in the international economy.

How will the CBM’s GDP revision affect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech?
It may not be possible to meet this target. However if we do not meet this target, it is no catastrophe if we would have managed to mitigate significantly the negative impact of the international recession.
In this regard I do expect the social partners to appreciate the work being done by government. What would the eventual deficit be, it is again still early to say.




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22 April 2009

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