Speaking during the Finance Malta seminar on Wednesday, Central Bank of Malta (CBM) Governor Michael C. Bonello announced for the first time in 2009 that is was forecasting a negative growth for the Maltese economy this year. This was the third time since February that the CBM changed its forecasts. Until two months ago, the CBM was still forecasting a growth of 0.5 per cent to 1.1 per cent. It was only after the European Commission revealed in the Spring Economic Forecasts that the Maltese economy was going to contract by 0.7 per cent in 2009 that the Central Bank decided to revise its GDP forecasts for 2009. CHARLOT ZAHRA asked two prominent economists – Labour candidate for the EP elections Edward Scicluna and veteran economist Karm Farrugia about the significance of this announcement and its reflection on the Central Bank of Malta’s forecast methods, among other things.
Karm Farrugia: “A negative growth rate of 1 per cent would be satisfactory in the circumstances”
What is your comment about this revision, which came only after the CBM Governor had forecast on 9 April 2009, that the GDP for 2009 would grow to 0.5-1.1 per cent from 1.6-1.7 per cent in February? The CBM’s latest forecast is almost exactly my forecast as already expressed to you earlier.
Do you agree with the Central Bank Governor’s decision to revise the GDP forecast for 2009 again? Why? Of course I do. In such circumstances as prevailing, the growth forecasts should be revised even on a monthly basis if necessary – certainly quarterly.
Why was such a wide revision of the GDP forecast for 2009 necessary at this stage? There are those who believe that one could “talk oneself into recession” and, hence, their forecasts are necessarily pitched at the best of probabilities. Politicians everywhere seem to follow this trend, and this is understandable.
What is condemnable refers to their unjust accusations on those who forecast on the “most likely” column of the range of probabilities, sometimes even accusing them of partisan bias. Apolitical economists feel hurt, but that’s politics in Malta.
Do you agree with the extent of the revision of the CBM’s GDP forecast for 2009? Why?
Yes I do. And I sincerely hope that the Government will accept it and act on it in order to prevent a worsening re-forecast in July/August.
It is my view that the Maltese economy would be doing well if it manages to keep its negative growth at -1 per cent, and, more importantly, to bring down “scandalous” inflation to below 1 per cent yearly.
In view of the revision of the CBM’s revision of the GDP forecast for 2009, 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?
Of course not! Even the Minister accepts this inevitability, especially with an inflation rate of plus 4 per cent which impinges heavily on “growth” measurement.
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?
The CBM would do well to re-forecast the budget deficit in the light of its revised growth projections.
In your view, is it still realistic?
Certainly not realistic, especially as aggravated by the recent Government’s easing of tax payment dues.
What would be a more realistic forecast of the budget deficit for 2009?
I have already given you my views as seen a few weeks ago. If the Government doesn’t manage to save on non-essentials in the Recurrent Account I find it hard to forecast a deficit less than 4 per cent of GDP which, in my view, is not unsatisfactory in present-day conditions, even if the ECB maintains its inflexibility.
Edward Scicluna: “Enough time has passed for Malta to have its own quarterly economic model”
What is your comment about this revision, which came only after the CBM Governor had forecast on 9 April 2009, that the GDP for 2009 would grow to 0.5-1.1 per cent from 1.6-1.7 per cent in February? No projection based on an econometric model needs to forecast exactly. However it seems that in the case of the forecast that has been done recently by the Finance Ministry as well as the Central Bank, there have been huge divergences between their forecasts and those provided by the European Union.
I had explained in my opinion that this was due to the fact that the Central Bank was still using an annual model, instead of a model equipped for quarterly forecasts.
These two kinds of models, although similar to each other, are used for different purposes.
The annual forecast model is used to forecast over a number of years, say, three to four years, while the quarterly model is used to forecast the economic performance for a short period, of between one to three quarters of a year.
An annual forecast model is not equipped to forecast movements of less that a year.
It is useless running it with new estimates. It technically does not have the capability to factor for quarterly cycles such as those in tourism, but always forecasts how the year will end.
A lot of people in business want to know what is going to happen in the next three months, not necessarily a year from now. The annual model does not give you this result.
It is therefore evident that the forecast that the business community and the Government need is the quarterly model. It is clear that this country, unlike most of the European countries and global countries, still does not have a quarterly economic forecast model.
I personally was studying in Toronto 30 years ago and as a research assistant, I assisted in the updating of a quarterly model with which the Canadian Government and the business sector used to forecast the Canadian economy.
I would have expected that enough time has passed for Malta to have its own quarterly model. I have introduced econometrics at the University of Malta shortly after returning from Malta, therefore I say that we have a lot of bright and capable graduates who have studied this subject and afterwards specialised in it abroad.
What foreign countries do is immaterial for our country. The European Union surely has got a quarterly economic model. Whichever is the method used to forecast the economic indicators for Malta, surely the result is always better than that forecast by the Maltese Government. However we should not always rely on others to do our work.
In life nothing is easy. However we cannot not try. Imagine if we gave fishermen the average of a weekly forecast instead of a daily (in fact three times a day) forecast. If we can manage to forecast the weather for such a short period of time, in the same manner we need to forecast the economic performance on a shorter span and at a nearer periodicity with a model that is adequate and acceptable for the economic profession. I am sure that with a little effort, this can be achieved.
What is your comment about this revision, which came only after the CBM Governor had forecast on 9 April 2009, that the GDP for 2009 would grow to 0.5-1.1 per cent from 1.6-1.7 per cent in February? No projection based on an econometric model needs to forecast exactly. However it seems that in the case of the forecast that has been done recently by the Finance Ministry as well as the Central Bank, there have been huge divergences between their forecasts and those provided by the European Union.
I had explained in my opinion that this was due to the fact that the Central Bank was still using an annual model, instead of a model equipped for quarterly forecasts.
These two kinds of models, although similar to each other, are used for different purposes.
The annual forecast model is used to forecast over a number of years, say, three to four years, while the quarterly model is used to forecast the economic performance for a short period, of between one to three quarters of a year.
An annual forecast model is not equipped to forecast movements of less that a year.
It is useless running it with new estimates. It technically does not have the capability to factor for quarterly cycles such as those in tourism, but always forecasts how the year will end.
A lot of people in business want to know what is going to happen in the next three months, not necessarily a year from now. The annual model does not give you this result.
It is therefore evident that the forecast that the business community and the Government need is the quarterly model. It is clear that this country, unlike most of the European countries and global countries, still does not have a quarterly economic forecast model.
I personally was studying in Toronto 30 years ago and as a research assistant, I assisted in the updating of a quarterly model with which the Canadian Government and the business sector used to forecast the Canadian economy.
I would have expected that enough time has passed for Malta to have its own quarterly model. I have introduced econometrics at the University of Malta shortly after returning from Malta, therefore I say that we have a lot of bright and capable graduates who have studied this subject and afterwards specialised in it abroad.
What foreign countries do is immaterial for our country. The European Union surely has got a quarterly economic model. Whichever is the method used to forecast the economic indicators for Malta, surely the result is always better than that forecast by the Maltese Government. However we should not always rely on others to do our work.
In life nothing is easy. However we cannot not try. Imagine if we gave fishermen the average of a weekly forecast instead of a daily (in fact three times a day) forecast. If we can manage to forecast the weather for such a short period of time, in the same manner we need to forecast the economic performance on a shorter span and at a nearer periodicity with a model that is adequate and acceptable for the economic profession. I am sure that with a little effort, this can be achieved.
