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Network News • 16-02-2023

After the pandemic, a feel-good factor returns

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 16th February 2023

The new year has started with more intensive raids on Ukraine by Russian invaders. This is a sad turn in the invasion since everyone expected the attacks would slow down due to the harsh wintry conditions.

As can be expected the uncertainty in energy supply caused by the war has negatively affected businesses of all sizes across Europe. Add to this the upward struggle to find a solution for record shortages of skilled labour, the many and various requirements of the green and digital transitions, and now faced with the prospect of higher borrowing costs.

To boot add a lower consumer demand. In Malta, the problem of skilled workers has also featured in many discussions at MCESD and many suggestions to tackle it abound. But not all is doom and gloom as 2022 Business Performance Survey, conducted by Misco, reveals how a majority of small businesses saw profitability exceed or equal pre-pandemic levels last year.

This survey was commissioned by the Chamber of SMEs and showed 39% of respondents said they had better profits last year than they did in 2019. A small group of 15% said their profits were more or less equivalent to 2019 and 17% saw profits close to pre-pandemic levels. This has improved the feel-good factor which is also the result of an immediate subsidy by the government to cap prices of fuel and grains.

The International Monetary Fund (IMF) has praised Malta for its "remarkable" economic recovery after COVID-19 but urged the country to plan the easing of a subsidy on energy prices. Maltese authorities should prepare an "exit strategy" from the fixed-energy-price policy while protecting vulnerable groups. IMF opines Malta's financial system remains sound, but emerging risks warrant continued vigilance and close monitoring of banks.

The fly in the ointment is the loan book profile which favours the property sector. It is important for the authorities to closely monitor banks’ risk management to ensure that provisions are continuously updated as economic prospects change. One is not surprised about this comment, given the banking sector’s large exposure to the housing market, the consideration of introducing a sectoral systemic capital risk buffer targeting mortgage loans is warranted.

As regards another predicament, one needs to address the labour market post pandemic. Solutions to this problem include more efforts to address labour skill mismatches, increase STEM (Science, Technology, Engineering and Maths) graduates, enhance vocational training, promote research and innovation, and advance the digital transformation of SMEs.

A lot has been done by MCAST to beef up vocational training especially for early school leavers. On the upside, economic factors such as easing of oil prices and a negligible drop in inflation rates lead to stronger growth than previously forecast. Acute mobility problems eased a bit as the number of people who commuted by bus in January increased by 17% when compared to pre-pandemic times.

According to recent data listed by the Malta Public Transport (a monopoly of mass transportation company). It carried 4.5 million passengers in the first month of 2023 - an increase of 59% compared to January 2022 and 17% when compared to January 2019. Castille will be jubilant seeing how tiny Malta has fared better than the EU average, which is projected to see annual GDP growth of 0.8% (and 0.9% in the euro area). This year, our economic growth of 3.5% will be the second strongest, with Ireland projected to see growth at 4.9%.

Looking deeper into the statistics one notices how last year our real GDP growth was estimated to have reached 6.6%, which was higher than forecast by the commission last year. The strong impulse to growth from the recovery in tourism is however set to moderate in 2024.

Notice how the strain on domestic demand due to inflation - this topped 6.1% in 2022, despite energy prices being capped at 2020 level by government intervention. A healthy drop for this year shows inflation to reach 4.3%, mainly resulting from continuing pressures in food, transport, and imported goods prices. In 2024, inflation is expected to subside to 2.4% as imported price pressures are also set to moderate.

More upbeat news comes from a declaration by economy minister concerning Small and Medium Enterprises drive to expand their industrial space. They will again be able to apply for rent subsidies this year. A cap of €25,000 in yearly government assistance has been doubled to €50,000 for 2023. The three-year limit on the grant has also been doubled.

This means that an SME can benefit from rent subsidies for up to six years, as long as the final three years of the subsidy are given as a tax credit.

Good tidings arrive from a major US investment bank Goldman Sachs as it no longer expects a recession across the euro¬zone in 2023. This month, Deutsche Bank revised its forecast for European growth upwards, from expectations of a contraction of 0.5% in 2023 to a 0.5% expansion. Eurozone consumer prices in January eased to 8.5 per cent, down from 9.2 per cent in December, helped by a continued slowdown in the pace of energy cost rises.

With some nostalgia, one notices how our resilient multi-million-euro property market has blossomed over the past ten years under Castille’s expansive policy. The GDP growth more than doubled in ten years as the island has never seen such grandiose building projects and full employment. Public land worth millions was granted to selected hoteliers at fire-sale prices to encourage promotion of upmarket tourism.

During the so styled “l-Aqwa Zmien” (the seven years under ex-prime minister Joseph Muscat) money was no problem and the economy flourished resulting in acute shortage of workers which was partly solved by engaging third-country migrants. In fact, thanks to Muscat’s populist administration, the economy turned the corner unleashing a feel-good factor that saw the nation throwing caution to the wind.

To buttress the drag in the housing market caused by the pandemic, Government now led by Robert Abela introduced a reduced tax and duty rate of 5% and 1.5% respectively on the first €400,000 of immovable property’s value. This reduction had been temporary extended and was rated by estate agents as a very effective COVID-19 measure introduced in 2020 to keep the property market afloat. While the housing prices eased a bit during the pandemic, it is now back on its previous trajectory of rising demand.

In conclusion, after the turbulent pandemic days, let us celebrate our feel-good factor while migrants clean our streets, man our beach resorts and assiduously serve us in hotels and restaurants.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 16th February 2023
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