The Writing on the Wall

10^th February 2008

The Malta Independent - Friday Wisdom

All through the next month one topic will dominate party talk, office talk and ordinary gossip. Who is going to win the next election?

Some will rely on published and unpublished surveys, with little ability to distinguish between the professional and the amateurish and with scarce sensitivity to the fact that the difference between the two main parties is often so small as to fall within the margin of error of even the best surveys. Others will reach their conclusions on the basis of the amount of trepidations or relaxation they perceive in the personae of the main party exponents. Some would even read their coffee grounds or their cards disregarding the fact that the brain is geared to see what it really wants to see.

I had already expressed the view early in the new year that this time, by a hair or by a mile, the electorate’s fatigue with the PN in government is too strong for anything to stand in the way of a Labour victory, irrespective of any reservations about Labour’s own merits to fit the bill.

Though commanding no scientific value whatsoever, I also tend to search for contemporaneous events that can be linked casually to the outcome of past elections when similar events also existed.

Is it not odd that Labour always seems to be elected to power at a time when the international economic environment starts to worsen and the prospect of an international recession becomes the dominating talk of the day?

It happened in the early seventies, first with the breakdown of the then prevailing exchange rate system followed by the 1973 oil price shock.

This plunged the world into a dangerously inflationary environment, which was compounded by the second oil price shock following the Iran revolution of 1979 and the tightening of monetary policy. This led to a very deep recession that only started lifting just before 1985 in time for the changeover to a Nationalist government in 1987.

The upswing continued until 1994 when inflation started to go up again and interest rates had to be suddenly raised. By 1995 the world faced a major financial collapse due to the Mexican sovereign default crisis. When Labour took over in 1996 the economic scenario had darkened so much that by 1998 the whole world financial system nearly collapsed through the Russian default, the Asian crisis and the bankruptcy of LTCM.

As soon as government was back in PN hands in September 1998, what seemed an intractable international financial chaos gradually fizzled away and the world resumed its upward trend, so much so that world markets were roaring again at the turn of the millennium.

We had a small exception to the rule with a short shallow recession in 2002-2003 but the world economy has been roaring ever since… until now that is, when we could be just about to vote Labour into power. The international scenario has darkened so suddenly that US growth at four per cent plus per annum in the third quarter of 2007 has changed to a near certainty of a US recession in 2008, which cannot but negatively impact on the economy of the rest of the world.

Another curiosity is that whenever the PN are about to be voted out of power they always seem to enjoy a shouting match with the GRTU. In 1996 the issue was VAT. Today it is the issue about the reliability of GDP growth figures being published by the NSO, which seem to be flying in the face of the hard reality faced by the small enterprises mostly represented by GRTU membership.

GRTU have commissioned professional studies by Professor Joe Falzon who, in a very convincing and well argued report, questions the methodology being adopted by the NSO for deflating the consumption components of the GDP to iron out the inflation element out of the nominal figures and arrive at real growth. Prof. Falzon has concluded that the deflators used to arrive at the real GDP figures for the second and third quarters of 2007 seem totally unrelated to the retail inflation percentages published for the same period by other NSO reports. The perfect correlation that long existed between these figures (the GDP consumption deflators and the retail inflation) suddenly broke down without any valid explanation in the second and third quarter of 2007.

It is regrettable that the NSO has ignored requests for publications of the methodology it used to arrive to the strangely out-of-line deflators. So out-of-line in fact that instead of ironing out inflation from the nominal figures they add to the nominal figures as if consumer prices were in fact falling rather than rising! The suspicion is that if false deflators were used the economy actually grew nowhere near what the government has claimed in 2007.

Until the 8 March election there is no calendar for the publication of important economic figures. The GDP for the fourth quarter of 2007 will be published on 10 March and government finance figures for December 2007 will be published in April 2008. Just as 26 October 1996 was chosen with a purpose, to avoid revealing the true state of government finances in the budget for 1997, could it be that the 8th March date was chosen with the economic calendar in mind? The writing is on the wall.