27 September - 3 October 2001

Economic slump

There is this eerie feeling in the country at present that what happened on 11 September in the United States does not bother us in the least – from an economic view point, that is. Apart from the government pledging its support in the fight against terrorism, there has been little reaction from industry and the business community in general after the attacks.
For those who still believe that a disaster thousands of miles away will not have an impact on their livelihood or business, the bad news is that unless they face reality they are in for an unexpected shock.
Globalisation has created a shrinking effect in the world. Isolation and doing business with your closest neighbour alone are concepts that have long disappeared. Today, thanks to huge improvements in technology and the internet, your latest supplier or trading partner can have his business half way around the world. Therefore, falling for the mistaken belief that “unless it happens in my own backyard there is nothing to worry about”, is the worst mistake any Maltese businessman can make.
The attacks on the US earlier this month have sent shockwaves throughout the world’s economies. The US Federal government has been pumping in billions of dollars to save crucial sectors such as the airline industry. Closer to home, the European Central Bank has cut interest rates twice – a rarity – in order to dampen the negative impact on European markets. Local businesses and industry should be fretting now that it is becoming clearer that a recession in the US is on the way. The US, which was already on the verge of one before the attacks, is now asking how long it is going to last. In Europe, economists are closely examining the ripple effects such a US recession will have on their economies; hoping for the best.
There is no doubt that Malta will be affected and a number of sectors are already feeling the pinch. Tourism and travel are perfect examples. The US has cut down drastically on flight schedules. Over 100,000 are expected to be made redundant over the coming months. In Europe, airlines have reported hundreds of cancellations as travellers fear taking to the skies. Ryanair, in a bid to encourage travelling, has reduced its fares to £9.99 for certain destinations. Conferencing and incentive travel have also suffered. Major conferences being held this month have been cancelled or rescheduled. The Maltese tourism industry is also having problems. Hundreds of flight cancellations have been reported and one hotel group is said to have lost Lm50,000 in conference business.
Tourism, however, is not the only sector facing a rough ride. Investments have taken a sharp knock as well. People with pension and retirement plans in foreign funds have seen their net worth going down by up to 25 per cent since 11 September. Yet, no one seems to be concerned. What will happen if industry’s major trading partners hold back on new exports from Malta? Who is going to make good for any losses? The government, which already has enough financial problems to cope with, let alone a ballooning borrowing bill? No one seems to be asking these questions?
Then you have the local insurance market. The expected toll on the world insurance market could be anything between $10bn and $70bn. Insurers and re-insurers are surely going to raise premiums. Is anybody concerned that local premia will be going up?
This does not mean that Malta is in the midst of a recession or about to experience one, but the country cannot remain passive in the face of mounting economic and financial problems beyond our shores. It is the government’s prerogative to ensure that fears resulting from this month’s terrorist attacks will not bring about more uncertainty and a bring to a halt consumer spending.
The long-term effects on the economy will depend to a great extent on consumer confidence. The chances that Maltese companies will have to lay off workers are minimal, but this does not mean that cash-strapped citizens will not stop spending if forced to. The government must do its utmost to ensure that people continue spending. It must look very carefully at its plans for the next budget. Apart from boosting the economy through fewer taxes and more incentives, the government must cut down heavily on public expenditure.
It will take some time before the real impact on Malta’s economy can be calculated. What is certain, though, is that recent developments have put greater pressure on government to get its house in order. If Malta is to come out of the storm unscathed, the government needs to do much more.