Times of Malta in conjunction with Seed is serializing the economic report Agile. Perspectives on Malta’s economy post COVID-19. The report was authored by JP Fabri, Glenn Fenech, partner and senior consultant at Seed, and University academics Professor Vincent Cassar, Dr Stephanie Fabri and Dr Jonathan Spiteri. The full report can be read here

A modern globalised economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries. Everyone is someone else’s employee, customer and lender. It is also a web that is nested within an external environment and any changes in this environment will have an impact on the rest of the system. This is what is defined as an economic shock. 

Although there is no absolute consensus between academics, an economic shock is best defined as an unexpected event which will impact the economy. Economists distinguish between two types of shocks: exogenous and endogenous. Whereas the latter is a result of developments within the economic system, like the financial or banking system, an exogenous shock is a result of an outside event such as a natural disaster or pandemic in this case. 

What is important to understand is the transmission mechanism once a shock occurs and how this will impact the real economy. The schematic below illustrates the possible transmission mechanism of the shock and possible policy responses to it. 

The greatest economic concern when it comes to COVID-19 is the uncertainty involved, given that it is still ongoing with no vaccine or drug therapy yet available. Lockdowns of one country are obviously affecting global supply chains and therefore the impact of the crisis is expected to be prolonged and multi-faceted. COVID-19 is also expected to lead to significant changes in societies and economies and therefore the response by policy-makers need to be multi-layered too, with stop-gap solutions to avoid the recession turning into a protracted depression and more importantly, having a long-term recovery plan for the economy that will operate in a new normal.

As the flow diagram above illustrates, the coronavirus outbreak is an exogenous shock that — because of the need to engage in self-distancing and remote working — is causing the current supply shock. This will disrupt supply chains and lead to a loss in output which is resulting in loss of employment too in a number of sectors. This will obviously lead to a loss in incomes which is transforming the supply shock into a demand shock. Also, as the lock-down continues, people are spending less and a fall in consumer spending within an economy that is based on services and non-essential spending has the potential to drag the entire economy into a long recessionary period.

The interplay between loss of output and demand can easily lead to a financial shock, as exposed firms will not be in a position to service existing mortgages, and defaults start to materialize. In addition, the loss of confidence and lack of risk-taking by firms and individuals will also increase pressure on the financial system. Should this happen, the long-term economic cost will be significant. 

Perhaps more important for the recovery phase and for long-term growth is to understand and shore up the willingness of borrowers and lenders to invest. Investment decisions are now faced with increased uncertainty regarding the potential for another attack on the global supply chain, a loss of confidence in the economy to withstand another attack, and a loss of confidence regarding the infrastructure for dealing with this and future crises. 

Given its importance, the following section gives more depth and insight into the role of risk.

A spotlight on risk and uncertainty

It is clearly undebatable that the world is going through unprecedented times, and what started as an infectious disease in China has become a global pandemic in a few months. COVID-19 has hit hard to the extent that it has impacted in the most dramatic of manners the lifestyle of millions of people, bringing to a nearly complete halt all those activities that, up to a few weeks ago, shaped modern society. 

This current world scenario is unprecedented in more ways than one.

First, COVID-19 is a relatively unknown virus and therefore the situation has been accentuated by the very fact that we are not only experiencing uncertainty but also having to deal with the unknown.

Second, the issue is global and has impacted many countries within a short period of time.

Third, while scientists are working around the clock to find a suitable vaccine, nobody knows when the world will actually be out of this tunnel. Indeed, we are experiencing the proverbial Black Swan (Taleb, 2010) which is best captured by the notion that we don’t know what we don’t know, making predictions less likely to be at best intelligent guesses and at worst erroneous conclusions. As Posner (2010) rightly emphasises: “Conventional wisdom places a premium on the long-term outlook. But during periods of extreme volatility, such an outlook may be unrealistic because the long term could be swamped by near-term uncertainty” (p. 31). 

All this means that forecasting and rationalising by adopting a clear understanding of the facts (Kahneman, 2011) is possibly dangerous right now, simply because we do not have the facts, or at least all of the facts that would permit us to generate more precise predictions! Gigerenzer and Brighton (2011) argue in this regard for more ecological rationality, and that trusting our heuristics may be better than any other prescriptive predictions. We are indeed in a zone of managing the unexpected (Weick and Sutcliffe, 2007) by weighing things in the short term and taking one step at a time, building new understanding as we move along.

Coupled with this scenario is the element of risk. Again, because we are surrounded by uncertainty and the unknown, the incoming signals fuel a substantial degree of amplification of risk (which is expected) as the pandemic impacts a number of subsystems in the world order as we are used to and dents the same sense of anticipation we all have.  Sending off ripple effects creates the right ambience for the spread of the impact and leads to unwanted and undesirable consequences (Slavic, 2000). In this state of affairs, the world gasps for air as it tries hard to attain control.

This scenario presents to us a number of challenges, amongst them whether the will to trust and to build a sense of confidence in our future endeavours will bounce back once this is over. It represents an instance where we cannot be over-confident in our decisions but need to take stock of where we are and do it in small and frequent doses to enable us to contain the spread of the unknown and uncertainties over and above those created by COVID-19. People may not operate mechanically as some may wish to, and their response will be dependent on a strong sense of conviction that the worst is really over. 

These behavioural realities must be taken into account when discussing potential alleviatory measures intended to soften the economic blow of the current crisis, as well as the road towards eventual recovery in a post-COVID-19 world. In the short term, losses in income loom large over people, both in real and psychological terms, which in turn may colour their perception of reality, even as the crisis subsides and economic activity picks up (Lee & Veld-Merkoulova, 2016).

Furthermore, the random nature of the current crisis contributes to a heightened sense of helplessness and lack of control, dampening the natural sense of confidence and optimism that drive entrepreneurial spirit and risk taking. As a result, it may take significantly longer to re-attain economic normality due to sluggish investment and consumption behaviour as people, reeling from the losses of the crisis, hedge their bets and reduce their risk appetite. Given the herd-like behaviour of investors, the need for timely intervention is even more pronounced in order to prevent the rot from truly setting in and quickening the pace of economy recovery.   


It is for all of these reasons that COVID-19 presents itself as an unprecedented shock to global and national economies. Governments need to, and have all started to, implement wide-ranging and significant policy response packages. 

Fiscal measures are needed as a stop-gap solution to ensure that income continues to reach households and to support enterprises as they face supply and demand side shocks. Governments, including Malta’s, have launched direct cash payments, tax deferrals and loan guarantee packages as part of extraordinary budgets to support the initial economic shock. It is expected that as the effect of the pandemic expands, more responses will be announced. In tandem, monetary authorities too reacted with the European Central Bank issuing a mix of quantitative easing and bond buy-back programmes. Given that the world was already in an unprecedented low-interest rate environment already, the tools available to monetary authorities remain limited. 

However, it is becoming obvious that the world post-COVID needs to adjust to a new normal. Social distancing and the fear of an invisible enemy such as a pandemic is bound to change practices, work-places, consumer behaviour and trends. Global supply chains will also change and also the economic structure of many industries and countries will be altered. The economy will be different.

Therefore, for the recovery to be meaningful and sustainable, countries and firms need to embark on a long-term recovery and strategy. Nationally, the Government needs to embark on an exercise that will deliver a long-term economic vision and strategy to not only recover from the current challenges but more importantly to position itself in a new normal. Opportunities will abound too. We must not lose sight of the long-term, and a cohesive vision for the country.


Gigerenzer, G. & Brighton, H. (2011). Homo Heuristicus: Why biased minds make better inferences, In G. Gigerenzer, R. Hertwig & T. Pachur (Eds.), Heuristics: The foundations of adaptive behaviour. Oxford, UK: Oxford University Press (pp. 2-30). 

Kahneman, D. (2011). Thinking, Fast and Slow. UK, StIves: Penguin Press.

Lee, B., & Veld-Merkoulova, Y. (2016). Myopic loss aversion and stock investments: An empirical study of private investors. Journal of Banking & Finance, 70, 235-246.

Posner, K. A. (2010). Stalking the Black Swan: Research and decision making in a world of extreme volatility. New York: Columbia University Press. 

Slovic, P. (2000). The Perception of Risk. Oxford,UK: Taylor & Francis.

Taleb, N. N. (2010). The Black Swan: The impact of the highly improbable. England, St Ives; Penguin Press.

Weick, K. E. & Sutcliffe, K. M. (2007). Managing the Unexpected. US, San Francisco: John Wiley & Sons.

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