The Central Bank of Malta recently published its projections for the Maltese economy for 2020-2022. It is a very interesting report, saying it as it is. There is food for thought for anyone interested in understanding how our economy is performing and is expected to perform.
In its introduction, the CBM states: “Latest data suggest that the Maltese economy is likely to have recorded an unprecedented contraction in the second quarter of 2020, though there are signs of some stabilisation in the third quarter. Nevertheless, the Central Bank of Malta expects Malta’s Gross Domestic Product (GDP) to contract by 6.6 per cent in 2020. Subsequently, it should grow by around 6.1 per cent and 4.2 per cent in the following two years.”
I believe this economic contraction, the effects of which have been felt and are still being felt across the whole of Maltese society, provides the opportunity for reflection as to what really creates our economic wealth.
The National Statistics Office has also published the data on the gross domestic product for the second quarter of 2020 and provides the information as to how our economy has been hit by COVID-19. In volume terms, the GDP decreased by 16 per cent during the second quarter of 2020 when compared with the corresponding period in 2019. The Central Bank projections indicate an improvement in the second half of 2020.
One interesting point that immediately sticks out is that, on the basis of the income approach of the GDP, total compensation by employees increased by just under four per cent in the second quarter of 2020 when compared to the same period in 2019. The brunt seems to have been borne by business profits which shrank by more than 20 per cent.
The social costs to our economy caused by the construction sector far outweigh any benefits
Admittedly, certain business sectors have received support from public finances in the form of wage subsidies, (it is important to remember that not all business sectors have received such support), however, this data reflects the resilience of the Maltese economy. The extent to which businesses can continue to take all the burden of the pandemic remains to be seen. At this stage, it is essential to recognise the efforts made by employers to maintain wealth generation in this country.
Looking at individual economic sectors, we immediately recognise the impact of manufacturing, tourism and the distribution sector on our economy. Gross value added in manufacturing shrank by eight per cent in volume terms while the distribution and the accommodation and food services sector shrank by more than 51 per cent.
The manufacturing sector was negatively affected by disrupted supply chains while the distribution and the accommodation and food services sector was affected by travel restrictions. It is also worth remembering that these two sectors provide employment not just directly but also indirectly, thanks to their multiplier effect.
The importance of these two sectors is also evident in the GDP data of 2019. Manufacturing contributed eight per cent to total gross value added of our economy, while the distribution and the accommodation and food services sector contributed over 21 per cent to the total gross value added.
One comment about the construction sector as we need to debunk the myth once and for all that construction is key for our economy to thrive. Construction is the smallest sector in our economy after agriculture and fisheries. Its contribution to gross value added is less than five per cent, even though it probably is our largest noise and dust pollutant.
We need to understand that construction is not an important pillar of our economy and it does not contribute to our exports, and the facts show it. The social costs to our economy caused by the construction sector far outweigh any benefits. It is using up precious land for the benefit of the few and has contributed to the decline in agricultural activities, apart from causing a strain on our infrastructure, which taxpayers’ money has to make good for.
The services sector, subdivided in its various sub-segments, also continues to be a major driving force of our economy. Some elements of the services sector did suffer and shrank as a result of the coronavirus, but other elements continued to grow, even if at a slower pace than in previous years. Taken altogether, the services sector − excluding public administration and related activities − contributed to over 40 per cent to gross value added.
In this discussion, we cannot underestimate the contribution that the non-Maltese persons working in Malta make to gross value added. We have experienced strong economic growth also because we have had strong population growth. The extent to which this is sustainable remains to be seen. However, given our size, bringing in more non-Maltese to work here can hardly be considered to be a viable option for our economy to continue thriving in the long term.
We will continue to create economic wealth if we move up the value chain in most of our economic activities, like other countries have done. We need to address this issue now as the coronavirus is forcing us to accept certain realities like social distancing and while our economy is still strong enough to support such a process of renewal.
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