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Network News • 24-02-2022

Is Europe heading towards a strong recovery?

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 24 February 2022

Many have been looking forward to a gradual return to normality. Some thought this would happen when the Delta variant of the COVID-19 virus started waning. But this was quickly replaced by a stronger variant - Omicron.

The pandemic has slowed down the global economy while in Europe there has been a late attempt to create funds for boosting sluggish economies and keep thousands of workers on the work books by a state allowance through hastily devised furlough schemes.

Now almost two years down the line, since the first lockdowns, Europe is seeing a light at the end of the tunnel. Some say not a moment too soon.

This growth sign was attributed to the eurozone – the 19 EU countries using the euro – exiting two months of tough restrictions designed to slow the spread of the Omicron variant. Omicron is now the dominant strain in Europe, but governments regard it as less grave than previous variants because widespread vaccinations and booster jabs have muted its impact.

Economic growth in the eurozone jumped sharply this month as coronavirus restrictions were eased. In fact, the latest Eurostat data shows that the full 27-country EU economy grew by 5.9 per cent.  Analysts said the rebound showed strong divergences especially late in the year.

Contrast the negative growth in Germany during the final quarter while France, Spain and Italy expand healthily. France, was doing well, with growth at an eight-month high. Naturally, one has to mention the serious shortage of digital chips which have adversely hit manufacturing especially of cars and appliances. In fact, manufacturing output in the euro area would have been six per cent higher without the supply troubles.

Labour shortages and a worn-out infrastructure do have more persistent effects on supply and inflation than shutdowns due to Covid The shortage of microchips and the effect of higher cost of freight especially from Asia have all contributed to slower global supply chains. In fact, the IMF says that, without these obstacles, Germany and the Czech Republic would have seen an increase of 14% in output.

In contrast, official data shows Britain’s economy grew by a record 7.5% last year on easing COVID curbs after a pandemic-driven collapse, but analysts warned that sky-high inflation clouds the 2022 outlook. The UK recent expansion in output, which was the fastest since records began in 1948, followed a record 9.4% slump in 2020. Grounds for positivity was the expectation amongst investors that “coronavirus-related restrictions would be relaxed”, allowing an economic recovery in the first half of 2022.

The airline and hospitality industries are both victims of the restricted people mobilisation during the past two years. Both industries have been kept afloat on the drip by national governments while millions in losses accumulated in their balance sheets.

Again, there is hope that due to the slow improvement in the global pandemic situation, one can expect an improvement of international and long-haul travel figures – the revenue stream that has been the most depressed in the past two years for airlines.

Even though Omicron still creates uncertainty among airline managers, this will probably not continue to severely impact airline profits in the warmer months as the virus subsides. Additionally, the pandemic is increasingly accepted as an endemic disease and is tackled as such by more and more countries that are also supporting our view of improving air passenger market conditions.

What is the general prognosis for the future? In general, one observes how manufacturing increased slightly, attaining the fastest expansion since 2021, thanks in part to improved supply availability and a rise in demand.  However, supply constraints remained, causing backlogs, and raising average prices for goods and services.

Again, due to the uncertainty arising from the Ukraine crisis, Europe faces soaring energy costs and rising wages. The UK and most European governments are willing to temporarily counter the resulting ‘heating poverty’ by subsidising energy bills for households, forcing energy providers to take losses, imposing windfall taxes on oil companies or to scrap VAT on electricity.

Central banks were too optimistic believing that inflation would come down by itself once the economy settles on a normal, post-pandemic path.  Already, there are signs that bank interest rates will go up. This will hike the cost of borrowing more aggressively with a purpose to bringing inflation down. The side effects of this monetary policy are possibly to disrupt growth.

The standoff with Russia over the feared invasion of Ukraine and other threats of pipeline and payment embargoes has quintupled gas prices in Europe. Back home and the Central bank of Malta (now run by an ex-finance minister) said that in 2022, domestic demand is expected to be the main driver of growth, reflecting strong growth in private and government consumption.

In addition, net exports are projected to also contribute strongly this year, as exports accelerate, while imports are projected to grow at a slower pace.  The general government deficit is expected to narrow substantially over the remainder of the forecast horizon as COVID-19 measures unwind and macroeconomic conditions improve further.

In two years, the Central Bank forecast the deficit now at 9.5% to narrow down to 3.3% of GDP. On its part, the general government debt-to-GDP ratio is projected to stand at 60.9% of GDP in 2024. All this bonanza is being announced at the cusp of a general election.

D-Day is Saturday 26th March.  Citizens are inundated by promises of a golden future by the two main parties even though one is surprised why the Labour Party, now in power for nine years needs to dangle a bigger carrot when surveys show they are expected to win with a landslide.

A recent promise by the incumbent to the party faithful was the splurging of a €700 million allocation (over 7 years) to improve green pastures and landscaping of parks and gardens for each village core.

Hot on its heels, is the pledge by the Opposition party to invest €1 billion to generate ten new niches for growth.  These niches are ambitious given that currently, the island is grey listed by the FATF. One niche which caught the admiration of many was the €100 million investment in MetaVerse, a software technology pioneered by Facebook.

It is a pity that none of the manifestos by main parties have ventured to invest in clean and renewable energy potential (producing green hydrogen) available in the recently declared new acreage under the Economic Exclusive Zone.

In conclusion, one hopes that as explained above, European economies will in 2022 usher a new cornucopia of growth, abundance and wealth.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 24 February 2022
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