One of the challenges we will have as a country as we recover from the negative economic impact of the coronavirus pandemic is to make sure that we remove imbalances in our economy. It needs to be said that even before the coronavirus, our economy was already experiencing some imbalances and during the last 18 months, some of these imbalances got accentuated and new ones may have been created.
Students of economics know that when we talk of economic imbalances, there are global imbalances and national imbalances.
Examples of global economic imbalances are an unfair distribution of resources between different countries, or a trade situation where certain countries export much more than they import and the other way round, or a high level of indebtedness of a country towards the rest of the world. In any case, economic imbalances lead to an inefficient use of resources which, as students of economics would know, are scarce.
As a result of the coronavirus, some of these imbalances have got and will get worse. As such, national governments have to put their heads together to address them.
However, there are also national economic imbalances we need to address. These would include too high or too low a savings rate; unsustainable government borrowing; a high level of personal debt; market failure in certain sectors; unemployment caused by the changes in the structure of the economy; and inflation. Unless we address each of these issues, there is the risk that the economy will falter.
Moreover, any government needs to promote a balanced approach to growth. A balanced economy suggests that economic growth is sustainable in the long term and the economy is also growing across different sectors – and not focused on one or two particular sectors.
When the data about the gross domestic product is published, we are told the headline growth rate. However, there would be some sectors which would have grown by more than the average rate and others that would have grown by less than the average rate, or even experienced a decline. Averages tend to hide important detail.
This has happened during the pandemic as well. The economic impact of the coronavirus on some sectors was minimal or even neutral.
On the other hand, some sectors experienced significant decreases in activity. These sectors have included tourism and the retail sector.
This year we are likely to recover some of the loss in GDP we had in 2020. However, this does not necessarily mean that all sectors would have performed well.
The high property prices ‒ both for purchase and for rental ‒ is an important contributor to the demand for higher wages, leading to a loss in competitiveness on the part of businesses operating in Malta
As such, although it is accepted that the support provided by the state during the pandemic needs to be tapered off, it would be foolish to think that all our economic woes caused by the pandemic would have been resolved.
Some sectors will still be suffering. The indications of a number of economic imbalances in our economy are various. Although we have a low inflation rate, property prices are too high and the increase in property prices has outpaced the increase in salaries.
The high property prices ‒ both for purchase and for rental ‒ is an important contributor to the demand for higher wages, leading to a loss in competitiveness on the part of businesses operating in Malta. I do not believe we could call our housing market as stable, which already gives a sense of an economic imbalance.
Unfortunately, little is known about the personal savings rate, that is the percentage of personal income which is saved. However, one does wonder whether our personal savings rate is too low, meaning we are spending too high a percentage of our income, or whether it is too high, i.e. we are not spending enough.
On the positive side, our banking sector is stable and healthy. Government borrowing is still at a sustainable level, although it is higher than budgeted. We have a positive balance on our current account. These all contribute to economic stability.
However, have income inequalities decreased or increased? If they have increased, the risk of imbalances becomes greater. Similarly, is the level of debt of the private sector sustainable? Again, if not, the risk of imbalances is greater.
Economic policymakers need to have complete visibility of these issues to be able to maintain a balanced economy.