Facing Today’s Business Realities GRTU National Business Conference Tuesday 16th December 2008 Facing Today’s Business Realities Prof Edward Scicluna
Implication for employment • A 2% annual fall in all export oriented industries including tourism translates into an over 1000 FT equivalent job losses directly and half as much again indirectly. • Most affected are tourism, transportation and recreational and similar services. • Less affected are the manufacturing industries, though the indirect effects of these are sometimes greater
Points for consideration • Q. How serious, how long, and how deep is the coming recession? A. Truthfully, we do not know. • Q. Should we act? A. Yes we should. • Q. When and How? A. We shall see.
The economy’s own in-built automatic stabilisers • Monetary: Falling output, lower inflation, higher real money growth, increase in output. • Fiscal Falling output, higher unemployment, lower taxation, higher unemployment benefits, higher expenditure, increase in output.
Other points: The source of increase in demand • An increase in domestic demand leads to an increase in domestic output and foreign goods, and therefore leads also to a bigger trade deficit, • An increase in foreign demand leads to an increase in domestic output and a trade surplus
Estimated Effects of Tax Changes Equivalent to a ONE percentage (1%) change in GDP • Reduction in Income Tax leads to a 0.9% increase in imports and 2.5% loss in tax revenue • Reduction in VAT leads to a 1.1% increase in imports and 1.6% loss in tax revenue
Monetary Policy • Room to manoeuvre? • The Fed, the B of E and the ECB have cut interest rates in 1% to 2% range. They still have some monetary policy to manoeuvre though not much • Malta expected to benefit from this aggressive monetary policy depending on the efficiency of our own transmission mechanism, which depends on the banks’ response to ECB rate changes • Nominal rates of interest cannot fall below zero
Liquidity Trap and Deflation • Once the NOMINAL interest rate is equal to zero, expansionary monetary policy becomes powerless, additional money is willingly held at the same rate of interest (zero). • In presence of deflation the REAL rate of interest starts rising causing less demand and output, and leading to further deflation, and on and on... • (Two examples are the Great Depression and Japanese Slump)
Fiscal Policy • Room to manoeuvre? • Many countries with fiscal surpluses have room for fiscal expansion (China, Singapore and some EU countries) • No one can go it alone since it spills in other countries and becomes costly for one country • Ideally we need a global fiscal expansion
Limiting Factors • Budgetary Deficit-GDP ratio • Debt-GDP ratio • External Trade Deficit-GDP ratio
Maltese Fiscal Policy • Malta has very little room to manoeuvre with a cyclically adjusted deficit of 4% and a debt/gdp ratio of 63.1% (end of 2008 EU statistics) and 2.8% and 63.2% (end of 2009 EU projections) • On its own a fiscal stimulus would quickly fizzle out (very open economy with many leakages) • It should participate in an EU wide fiscal stimulus when this is agreed
Microeconomic Policy • Malta has to make judicious use of this package by supporting firms genuinely needing assistance and families mostly affected by the recession • It should make full use of external structural funding for key infrastructural projects (ME - Twenty Million for Industry package) • It should reduce not increase charges or any obvious burden during these difficult time • It should be ruthless with public utility monopolies, private cartels, or any other sacred cow • It should not keep firms illiquid