Edward Scicluna explained that “any US recession would affect the Maltese economy through its global impact, that is, if other countries, especially the EU would be affected..
Leading economists speak about the effects of a US recession on the Maltese economy
Economists quizzed by Business Today about the effects of a potential recession in the United States (US) on the Maltese economy were in agreement that such a recession would affect negatively various sectors of the local financial system. Among the negative effects resulting from a recession in the US mentioned by the economists were a decrease in tourism and a rise in the price of property.
However not all the economists were of the opinion that a recession would actually break out in the US after all, as opposed to what the majority of financial analysts are predicting. Veteran economist Karmenu Farrugia told Business Today: “The old adage ‘when the USA sneezes, the world catches a cold’, unfortunately, still holds even today, though not to the same extent as in the past, thanks partially to the unification of European countries in the European Union (EU)’s single market.
He explained how the effect on the Maltese economy depended on how serious the anticipated recession turned out to be. “One must note that some action has already been announced that would inject billions of spendable dollars in the US economy, stimulating consumption and perhaps also an element of contro-cyclical investment (Keynesian economics in action). “Any recession, however light or heavy, would have both a direct and, not less serious, indirect impact on our economy. Our visible exports are not only just those directed towards the US market, but also as components to European firms themselves exporting directly to the US,” Farrugia warned. Asked about which sectors of the Maltese economy would be mostly affected with a recession in the US and why, Farrugia explained that “besides visible exports, services – especially tourism – are bound to suffer, not so much from a reduction of American tourists (whose direct impact is minimal) but from the reduction in the spending power of residents in countries which generally provide us with our tourism markets.
“Malta often provides such people with their second annual holiday which they might easily give up when faced with a lower income,” he told Business Today. Asked to elaborate about what action the authorities should take in order to protect the Maltese economy from the effects of a recession in the US, Farrugia explained that there was “very little” the Maltese authorities could do by themselves to assuage or minimise the resultant recessionary consequences.
Karmenu Farrugia said: “Any protective action needs to be taken by the EU itself, because we are part of a single, albeit large, market. At least we will be saved the erstwhile panic and talk of any devaluation of the Malta lira. If a currency will need adjusting, it will be the euro. “But I doubt if this is likely to happen because it would defeat the very objective the US itself is trying to achieve by stimulating its own consumption. “Action needs to be more global in its scope than hitherto, particularly in an attempt to reduce the international price of oil and cereals by encouraging higher outputs/production or breaking the cartelisation.”
On his part, economist Gordon Cordina told Business Today that a recession in the US would have “global repercussions, dampening economic growth across the world. “Activity in Malta’s small, open economy, which is highly dependent on exports, would be negatively affected by such an event,” Cordina said.
“Another possible impact would be an increase in domestic property prices, as local investors would become increasingly wary of international financial markets and acquire property instead,” he added. Cordina explained that another important consideration was the likely depth and duration of a possible recession.“Stock markets in the US are not being negatively affected by adverse competitiveness or economic fundamental factors but are mainly the result of a correction in the mispricing of mortgages. This is having an impact on household disposable incomes and hence, expenditures. “Yet indications are that fundamental productivity remains sound, which should serve the US economy well.
“The US might well skirt around a recession through a fiscal stimulus and lower interest rates, although the latest indications are that financial markets are somewhat pessimistic on this count,” he told Business Today. Asked about which sectors of the Maltese economy would be mostly affected by a recession in the US and why, Cordina explained that there are at least three different issues at play in this respect.
“One is the effects on demand for specific sectors of activity. The second the strength of the euro in the international markets for exports directed to a final destination outside the eurozone. The third is the resilience of specific sectors of economic activity to fluctuations in demand and prices. “Tourism and electronics are known to be very sensitive to fluctuations in prices and demand. Other sectors, including IT and financial services, and pharmaceuticals, may exhibit a stronger degree of resilience. But the fundamental issue remains competitiveness.
“Recessionary environments are typically a test of survival of the fittest, and whoever emerges less scathed will in the subsequent upturn be in a better position to profit from the improved economic situation. “Productivity, efficiency, low cost and innovation are thus more than ever crucial in a recessionary environment,” Cordina told Business Today. Asked to elaborate about what action the authorities should take in order to protect the Maltese economy from the effects of a recession in the US, Cordina said that “competitiveness issues would become ever more important and urgent.
“There is a role for the social partners to continue discussing and in a timely manner derive a package of measures to minimise the impacts of an international recession,” he insisted. On his part, former finance minister and economist Lino Spiteri told Business Today that a recession in the US “will impact all the rest of the world, including Malta. However, the likelihood of a recession is not large. “First of all in the US itself measures are likely to be taken to stimulate the economy. Secondly, continued expansion in the strong emerging economies and specifically in India and China are likely to offset any contractions that might come about because of a slowdown in the US economy.” Asked about which sectors of the Maltese economy would be mostly affected as a result of a recession in the US and why, Spiteri said curtly: “Obviously those companies trading with the US, but it would be futile to single out any.”
Asked to elaborate about what action the authorities should take in order to protect the Maltese economy from the effects of a recession in the US, Spiteri said: “It would not appear that the Maltese authorities can take any action should that hypothesis come about. “It would remain up to all those involved in exporting from Malta to ensure that the prices of the products of our goods and services are as competitive as can be in the circumstances. “As always, whatever the scenario, that will depend on innovative investment – investment in incorporating the latest technology, and increasing productivity,” he told Business Today. On his part, economist Edward Scicluna explained that “any US recession would affect the Maltese economy through its global impact, that is, if other countries, especially the EU would be affected. Our economy is tied very much with the EU economy.
“Every country in its own way would have to shave a notch or two from its own GDP growth. That puts the onus on our competitiveness to do double the work, to slow the sliding down. “In the past we were not so lucky. Every downturn was exacerbated by poor competitiveness and poor economic performance. This happened both in the early eighties and the early years following 2000. “In the early eighties we made changes to our Lira basket to soften the US Dollar-based fuel price inflationary impact, but resulting in a hard Lira which threw the economy in deeper trouble. Both the manufacturing and tourism sector were affected severely.“During the first four to five years of this millennium, our economy suffered both from an EU slowdown and lack of competitiveness. Most new EU member countries did not feel this slowdown. We did.
“Furthermore we exacerbated the final outcome because we decided to increase taxation in order to lower our deficit at that very crucial time-period,” Scicluna told Business Today.
Business Tday – Wednesday, 23 January 2008 By Charlot Zahra