The Shape of Recovery: How the Post-Covid Maltese Economy may Bounce Back
This article is authored by;
As businesses have reopened after government relaxed the social distance regulations, as the fear of a second Covid-19 wave ebbs at least for the summer months, the focus is now upon how our economy is going to respond to the stimulus provided to get people to start to spend again. But are people too afraid to consume over their barest needs? Will consumption ever return to the pre-Covid 19 levels, or has the lock down made people come to their senses and realise they can live as comfortably without spending as before the lock down?
How would anyone try to forecast a calamitous event that has never been experienced by any living soul? Is this a re-enactment of the Great Depression?
The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed (out of 121.8 million) and nearly half the country’s banks had failed. The Covid-19 pandemic has caused 40 million Americans to lose their job in these past three months, (although data shows that some 2.5 million new jobs have emerged as the lock down was eased), making the unemployment percentage today at 12% identical to the Great Depression of the 1929–39 era.
The Covid-19 Economic Shock
The Covid-19 pandemic has brought a level of uncertainty on a scale comparable to global wars. Whilst medical professionals around the world had strict scientific guidelines to adhere to and stir countries out of potential health care disasters, economists have little similar experiences to go by. Theories and predictions abound with prophecies that range from the “end of an era” type to impatient let’s-get-back-to-business cries that assure us we’ll be stronger than ever.
Some economists have turned to their textbooks. Macroeconomics, the science that analysis the economy on a wide national and globalised scale, is very proficient in describing business cycles and recessions patterns. Surely, most freshman economics students become quickly familiar with the famous recovery pictures that colour the pages of the most famous textbooks. A quick look at these theories show the intricate buffet of possibilities laid out by theoretical economics.
The Shape of Things to Come
A V-shaped recovery, for instance, means that the economy gets back on track quickly to its pre-recession trend. This is considered to be one of the most optimistic scenarios because it usually means that no serious damage has been done to the economy. In contrast, a U-shaped recovery pattern implies that the harm to the economy lasts until it goes back to the pre-crisis growth trend. Economists argue that under such a scenario the damaging features of the recession stay with us longer. Another possibility is a W-type recovery dynamic. This is sometimes referred to as a double dip. The economy appears to be recovering to its pre-recession growth trend, only to experience another recession later. The three above are usually the most common recovery patterns, but there are others. A swoosh pattern (symbol used to signify very good) could also be observed if the economic recovery is painfully slow to rise back to pre-recession status. Even more pessimistic is the possibility of an L shape recovery where the economy gains back a little after a steep drop but never goes back to its former positive trend.
Which are the most possible predictions?
The question is which type of recovery should we expect. Opinions vary, but amongst the most optimistic is certainly that of Wall Street. US equities have already recovered most of the Covid-19 losses in a clear display of V-shape expectations. Writing for Investing.com, Pinchas Cohen argues that whilst “it took more than three decades for U.S. stocks to return to the heights of the roaring 1920’s after the 1929 crash, in 2020 it has taken months.” He reminds us however that the post 1929 recovery occurred “without a safety net. Now markets are soaring because of unprecedented stimulus which the Fed characterizes as unlimited.”
Not everyone is quite so optimistic. In an interview with Yahoo Finance, Chief U.S Economist Gregory Daco argues that “we have to be very careful about all these indicators regarding corporate profitability, small business activity and overall employment once we are past the shock.” “The shock, “ he continues, “is going to represent more than 10% decline in economic activity, more than 30% decline in consumer spending and the data that we got today in terms of durable goods, in terms of employment, in terms of GDP are really backward looking.” He concludes by acknowledging that “I think we are past the idea of a V shaped recovery.” David Bloom, HSBC analyst told CNBC that a U-Shaped recovery will be the most likely pattern and we need to expect a lot of volatility. “The problem with the U,” he continues, “is that the government has to keep pushing and thus your fiscal starting position becomes absolutely vital.”
What about the Maltese Economy: Where is it going?
The government of Malta has recently announced a number of financial measures aimed at sparking the dwindling economic flame. Some of these measures include personal vouchers for all persons over the age of sixteen, the waving of trade licence payments, decrease in fuel prices, the extension of the wage supplement till September, and other measures that amount to 1.8 billion euros or 12.9% of Malta’s 2019 GDP. The idea is to inject liquidity and push towards a quick V-shaped recovery. Yet, economists argue that the effects of Covid-19, especially on consumers’ morale about long-term income expectations, will continue to be felt at least till a vaccine is widely available. This means that, notwithstanding the Government’s positive reaction, Malta might be in for a long and wild ride around that U-shaped recovery curve. Tourism is one such example. An industry that brings to the island an annual revenue of about 3 billion euros will surely be a shadow of its former self as many European households might opt for a local vacation, prompted by their respective Governments, to avoid airports and ports.
Aim towards sustainable growth:
Quality over Quantity
The COVID-19 story has presented a very important lesson: the key in going forward is sustainability. The only reasonable future is one that embraces a sustainable growth mind frame. Whilst the sustainable growth economy is not immune to systematic risk such as what is happening (for nothing can be totally risk free), it will put the country in a stronger position to adapt — one that flourishes not on irrational quantities but well-thought-out quality.
In the past five years the Maltese economy recorded super growth mostly attributed to the construction of apartments to rent to expatriate workers and tourists seeking AirBnB properties. Add as well as the substantial investment in increasing the number of hotel rooms to host the millions of tourists flying in year-long on low cost airlines connecting the Islands to mainland Europe. Admittedly, no one would have envisaged a scenario where airplanes are grounded and arrivals literally crash to zero! Even the most pessimistic risk managers juggling data in their mathematical forecasting models, may have predicted a slow-down, but surely not an overnight total lock-down!
To be fair, the world did have forewarning. In late 1997, just after China’s assumed sovereignty over Hong Kong, the territory was hit by an outbreak of the H5N1 virus known as “bird flu.” But that was quickly contained to the area. Then the severe acute respiratory syndrome (SARS) epidemic, also caused by a coronavirus, in late 2002 and 2003. Even as the virus spread, in the eastern hemisphere, the western society felt immune to the dangers of a pandemic. And sixteen years later the Covid-19 hit with a vengeance and caught everyone totally unprepared!
Thankfully, the Maltese economy is diverse. Hospitality is not the only foreign exchange earner to the economy. Manufacturing, financial services, ICT services, eGambling, give their fair share to the well-being of the economy, and although demand for all these economic players will be dampened with the global recession, each will continue to keep the economy running in the coming months, until inward tourism starts to pick up and give the extra kick to the economy. Maybe the Maltese should look at the hospitality industry as the cherry on the cake, rather than the motor that drives the economy, because in all fairness in times of global calamity, tourism is always the first to be hit.
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