The Economic Update published by the Central Bank of Malta shows that in February, the Bank’s Business Conditions’ Index (BCI) eased slightly when compared with the previous month. The publication said that this suggests that the economy was operating below, “…even if very close to its long-run average”.
A political cost
When one looks at the BCI graph, one notes that the indicator reached a peak in 2014 and has been on the decline, on average ever since. Since Q3 of last year, the indicator fell below the long-term average. Political observers noted that the upsurge was directly due to the investment which was unleashed following the Labour success at the polls in 2013. However, the Panama Papers revelations and the murder of journalist Daphne Caruana Galizia left an indelible mark on the attractiveness of Malta for investment.
However, the average value of zero in the BCI refers to an economy growing at around 4.0%. Thus, a negative BCI value should not be interpreted as negative GDP growth. When the BCI falls repeatedly below the lower band, one would be able to conclude that those episodes constitute periods of significantly below normal economic activity.
Newsbook.com.mt contacted economist and lecturer Dr Stephanie Fabri. She attributed the outcome of this trend to two forces that are working against each other.
Bottom performers in EU on economic sentiment
“First, there is a constant decline in economic sentiment index which is the main factor that has been pulling the BCI value downwards. Simply put, this indicator incorporates the sentiment with respect to five economic areas, namely industry, services, consumer, construction, and retail,” wrote Dr Fabri. As at February this year, Malta has had the second-lowest economic sentiment amongst EU countries. This is in contrast with EU and Euro Area averages which have registered an increase in the past months.
According to Dr Fabri, “When looking at the trend over the past few months, the outcome is likely to reflect the political instability which took place in the months running from November till January. It is very typical that political issues lead to economic uncertainty. In normal situations, we would have expected this indicator to recover in the months of March and April. However, given the current COVID-19 situation, it is very unlikely that we are going to see any improvement in economic sentiment in March and April”.
Dr Fabri said that the negative sentiment captured by the economic indicator outweighed the positive economic performance that was registered and captured by strong economic growth. “Industry production remained strong, tourism increased together and so the average nights of stay. In addition to all of this, the gainfully occupied population continued to increase with unemployment standing at an all-time low” said the economist.
A lag between perception and action
When analyzing the meaning of the figures, Dr Fabri said that it would have been very worrying if employers and consumers acted on their low confidence and were cautious with their economic activity. “This was evidently not the case. There is a lag between perception and action. Had political instability persisted, we would have most probably seen significant effects on the economic indicators, however, this was not the case. Whilst people were not fully confident in the economic environment this was not enough for them to hold back on their economic activity” said Dr Fabri.
No silver lining
With COVID-19 still an ominous presence on the economic cosmos, Dr Fabri said that in the coming months “…we do not expect to see an upturn in the Business Conditions Index, not only in Malta but across the globe. This is because the current situation is based on actual facts and not only perceptions. In addition, most economic activity has been rightly stalled in order to contain the spread of the virus. The question is how negative the impact will be. This depends on a variety of factors including the responses of businesses and consumers post-COVID. However, the determining factor will be how national governments will intervene and how much of the intervention will be coordinated to save both global and national economies”.
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