Yes we are living in uneasy times.
The latest Central Bank review announced a negative dip for two consecutive quarters which technically leads to a recession. Today, despite some signs of financial and economic improvement reported by Germany and France in the second quarter one recognises that Malta is late to enter in recession and hence it will take longer to exit. Most economists in Malta expect economic growth in the next few quarters to be confined in a straitjacket conditioned mainly with the revival of our export markets. To catch up with mainstream Europe we need at least a five per cent growth in GDP but this is a challenge.
In the financial press last week, a lot has been said about German and French economies bouncing back in positive growth in the second quarter. This good news raised hopes that in the third quarter there will be some relaxation of the credit crunch that has gripped Europe. True, these two major economies have suffered four consecutive quarters of negative growth and now for the first time are sprouting new grass shoots spurring optimists to expect sustained growth turning into solid oaks. Greece and Portugal also grew 0.3 per cent in the second quarter. A better than expected performance in US-reported redundancies has compounded the hopes that the worst is over and we are starting to slide upwards in the nursery slopes of growth.
All this means a lot to Malta and its fragile economy, particularly if we can do our best to temper our steel to offer a better product with a higher productivity and lower labour cost. This has not happened as yet and again quoting the Quarterly review one reads how unit labour costs accelerated in the first quarter of this year and may remain high once the cost of living adjustment is announced.
Paradoxically, the labour costs have outpaced productivity according to my interpretation of the Central Bank report. There has been reported a drop of 1.3 per cent in measured labour productivity linked to a to a 3.2 per cent increase in compensation per employee. Yet, the slide in productivity is partly solved if we can relieve the pressure on labour supply and reduce inflation which is currently double that of the Eurozone. Surely extreme measures such as those taken by Romania which sacked 10,000 public workers to ease the State payroll burden should be avoided. Inversely, a solution will be better with participation of the two groups that are in my opinion, currently under deployed; namely the proverbial “surplus pool” in the public sector and the low participation of married women. But, an improved supply means creating productive work for the marginal increase in workforce. This is not easy in a recession when jobs tend to shrink not due to natural wastage but due to an overall drop in economic activity (Spain is approaching a 20 per cent rate).
Equally, the fuller participation of women involves employers offering extended working hours, changes in flexible hours, more affordable childcare and the state offering a tax incentive to lure more females to make the extra sacrifice to meet the exigencies of family and career. On a positive side we see a healthy increase in the quality of education particularly in technical subjects catered for by MCAST. This is linked to a wider population of undergraduates at University. Such technical courses on offer are tantamount to sustain a competitive advantage for workers who are constantly expected to be savvy on mustering challenging techniques. This is particularly felt once Smart City project starts issuing applications for workers with ICT backgrounds.
New IT subjects currently taught at MCAST are likely to augment productivity levels which, as stated above, need constant upgrading. Provided our technological level in courses offered to technicians attending MCAST colleges is up to speed, then workers can face the challenges set by employers in higher value-added sectors. Thus, we can expect that technicians will become familiar with new advances in materials, pick up the exploitation of ICT and in some instances participate in experiments leading to cutting-edge technological discoveries. This is not to mention that research at university can start exploring new technologies that are linked with both mechanical and medical engineering as these lead to a closer link to the manufacturing and pharmaceutical industries that may be attracted to offer jobs in Malta.
Coupled with education and continuous training we need to keep investing in our infrastructure – particularly with the provision of adequate electricity power from reliable clean sources now that one of the two power stations is overdue for replacement. We must avoid taking a short term vision.
The problems that face businesses are now testing their resolve to reflect about survival. In some sectors such as manufacturing the news is not so rosy, as overseas orders have dropped and prices are becoming more competitive due to unrelenting competition from China. It is during such times that small and medium sized entities find it problematic to notice any green shoots and much less avoid looking for signs of any upturn. Retailers working within tight margins find it easy to give up the ghost rather then continue squeezing their profits during a recession. Banks withdraw the proverbial umbrella in a storm. During harsh times one tries to live for the day but once credit stops flowing then shop owners feel melancholy about the future. This is a dreaded feeling - emotively waiting to survive the thankless stretch until the flower of recovery blossoms out.
For example, sales of low-priced goods such as electrical and digital appliances may collapse as the profit margins drop so low that credit will not be readily available from banks to bail out the acute cash flow crisis. Already we have consumers reporting the closure of a major wholesale and retailer of white goods who has apparently packed up and left the scene leaving a number of consumers who ordered goods high and dry. You buy a washing machine and within the one year guarantee period you will find that the importer went bust and there is nobody to service the unexpired warranty. Harsh times have lured retailers/wholesalers to partake in a €10 million scam to save fines and vat dues in a scheme that was complex and involved collusion with VAT officers thus delaying its unearthing. These are familiar signs of a recession hitting the weaker players of the economy and we are not immune to avoid such casualties. It is the survival of the fittest. Yet on a national scale the island must strive to stabilise its public finances and reign in the deficit.
Once we achieve this, we can expect those who have invested here and who might be persuaded to invest here in the future to have confidence in us.
Controlling government spend and reigning waste is the first major step. A gentle fiscal stimulus which judiciously targets growth is also recommended. The electoral promise to lower the tax rate for managers and wealth creators is a right move expected in the next budget as it can encourage a stimulus.
The opposite is true that, if the state is lurching further and further into debt, there comes a point when fiscal stimulus isn’t very stimulating at all.
Thus we can only afford to increase spending in productive areas and not in building grandiose projects that will celebrate our politicians for future posterity but the IMF warned us it will exacerbate our yoke. As the Central Bank advised, it will be important to recognise that public funds should only be used to support activities that promise to be viable in the medium to long term
To conclude, facing our island insularity, business needs to be well disciplined to regain lost productivity and competitiveness. Paradoxically few fear the revival since preparing for an upturn in the market is something which tends to be neglected during a recession. However, it is a dire policy not to sharpen your tools when these are idle and human resources partly deployed. When the upturn comes, it will be sudden and will be heralded by a sudden gush of orders. Particularly, in industry it will be instant and if the capacity is not there since workers or plant have been laid up then the opportunity is lost probably for ever. The postman only knocks once.
George Mangion
Partner at PKF – an audit and business advisory firm
