2 - 8 August 2001

Business optimism at its lowest

by Ivan Brincat

Business optimism and medium-term expectations are at their lowest level since the third quarter of 1998, according to the Business Perceptions Survey carried out by the Central Bank of Malta for its June 2001 quarterly review.
This means that business optimism is at its lowest level since the quarter prior to the election of 1998 – a rather telling sign since business optimism is normally low before an election due to uncertainty in the country.
The survey, carried out between April and May 2001 covered a sample of 138 firms, employing 22 per cent of the private sector workforce and having a combined annual turnover exceeding Lm440m.
The level of business optimism is gauged from the number of respondents expecting an improvement rather than a worsening of the economic situation over the next six months.
The survey indicates that turnover in a number of sectors of the economy contracted over the first quarter.
The majority of export-oriented firms in the manufacturing industry registered a drop in sales during the quarter, while operators in the tourism sector also reported dissatisfaction with the results obtained.
Only the construction and real estate firms reported a significant increase in turnover while consumer demand remained subdued with domestically oriented manufacturing and services sectors reporting lower activity levels.
The Central Bank said these factors had a negative impact on respondents’ views about the immediate prospects for the economy. However, many firms said they planned to undertake new investment in the coming months.
The Central Bank said the deterioration in business sentiment mainly reflected the responses of the manufacturing sector, though operators in the electronics industry expected no change in the economic situation.
Most manufacturing firms, however, were of the opinion that the Maltese economy was more likely to slow down during the next six months.
Whereas domestically oriented manufacturing establishments had been expressing similar sentiments during previous surveys, export-oriented firms have now also become less upbeat.
This change of sentiment probably reflects increasing uncertainty about foreign demand as it becomes apparent that the slowdown in the United States will probably be more drawn out than originally expected, while the European economy is also beginning to show signs of weaknesses.
The Central Bank said that on their part, manufacturers producing primarily for the local market are going through a period of consolidation and restructuring in order to improve their competitiveness, a process that is made more difficult by the weakness of domestic demand.
Operators in the tourism sector have also become more pessimistic about the general economic outlook. This may reflect concern about the decline in arrivals from Germany at a time when prospects for a continued recovery in UK arrivals appears to be uncertain. Tourists from the UK were compensating for the setback in the German market.
Moreover, operators in the distributive trades have toned down their previous positive sentiment about the prospects for the Maltese economy.
This is linked to the drop in car sales and in imports of consumer goods reported during the first months of the year.
Most firms in the services sector, however, appeared to be somewhat less pessimistic than before although they continued to be cautious in their outlook.
The Central Bank survey however reported that optimism in the construction industry rebounded, as work on a number of projects gathered steam and government capital expenditure increased after having declined in previous years.
Survey participants have repor-ted that business turnover continued to decelerate during the first quarter of 2001, with the majority reporting a below-normal level of activity.
In fact, even the export-oriented manufacturing sector, which previously had been reporting above-normal activity registered a significant downturn in turnover.
Though the deceleration in export-manufacturing activity was once again attributable to the electronics industry, a number of other sub-sectors also reported a lower turnover during the first quarter. Export-oriented activity in fact dropped to its lowest level since the fourth quarter of 1998.
Operators in the tourism industry also reported a contraction in turnover. This may appear to be out of line with the rise in tourist arrivals and bed nights sold repor-ted by the National Statistics Office (NSO). However, the increased bed nights appear to have been channelled mainly to accommodation categories catering for lower-spending tourists which are not included in the sample survey.
Respondents have also indicated that consumer demand remained sluggish during the first three months of 2001. Locally oriented manufacturing reported a significant drop in turnover, with firms in clothing and footwear, furniture, paper and printing and chemicals sub-sectors – many of which had to face tougher competition as more protective levies were reduced – being the worse hit.
The Central Bank said that on a more positive note, firms planned to increase their investment in order to improve their competitive position in the long-term.
Respondents from the locally-oriented services which saw their turnover improve substantially during 2000 noted a deceleration in this survey. Firms in the financial and professional services sub-
sectors reported lower business volumes as investors shied away from the local stock market due to the protracted decline in share prices. The Central Bank said the survey might be overstating the slowdown to some extent, as the weight of the car importers within the sample is somewhat higher than their effective importance to the Maltese economy.
Car sales dropped substantially during the first three months of the year, as a number of factors that had boosted sales in the previous two years seem to have been
diffused.
The construction and real estate sector was the only one to report an increase in activity during the first quarter of 2001. Firms in this sector appear to be recovering from the slowdown in recent years that had resulted from reduced demand by both the private and public sector.