Friday, 22 August 2014

Mid-term assessment

This article was published in The Malta Independent on Sunday- 10 08 2014

Economists and financial analysts are forced to make a mid-term assessment of the economic performance of the first half of the year in the heat of August.   Analysing economic data which starts being released at this time of the year for the second quarter from a deckchair by the pool is not a perfect setting to gain the necessary focus, but I try.

Economic performance is benchmarked by standard criteria primarily consisting of Gross Domestic Product (GDP) figures – which give an overall view of the economy – and by indicators related to particular sectors primarily consisting of employment, inflation, tourism, balance of payments, and government finances.

Let me take them in turns without boring readers with too much number crunching.

So far we only have official figures for GDP for the first quarter of 2014.    Second quarter GDP figures will be available early in September.  Following GDP growth of 2.4% in real terms for the whole 2013, the first quarter of 2014 showed GDP gaining momentum registering annual real growth rate of 3.5%.    This augurs well, given strength we are witnessing in tourism and property market ( sectors which lends themselves better to smell tests than say manufacturing), that for the whole year 2014 real economic growth rate will come with a digit 3 handle.

My forecast is based on second quarter economic data which we now have for particular economic sectors.   Foremost amongst these is the data on employment.   The latest is the data of registered unemployed for June 2014.   This confirms a six month trend of reduction in the number of persons registering as unemployed and shows a reduction of 7.25% from the level of June 2013.    However this is more meaningful if put in the context of a growing labour market as it emphasis that unemployment is falling when the number of people seeking employment is growing. The latest Labour Force Survey for first quarter 2014 shows that the activity rate has grown from 63.7% in March 2013 to 64.8% last March. The activity rate is the labour force (persons working or seeking employment within the age bracket 15-64) expressed as a percentage of the population of working age (15-64).   The higher activity rate shows that persons within working age who were previously not seeking employment (e.g. married women) have now joined the labour force and are working or seeking employment.

Further confirmation of this trend of higher activity rate is the Gainfully Occupied Population which is available up to February 2014.  This shows that the pool of registered employed/unemployed has grown by 3.44% in 12 months to February 2014 compared to a growth rate of 2.36% in the previous 12 months. One should note the discrepancy in the size of the labour supply as measured by the Gainfully Occupied Population report and the Labour Force Survey. The former measures the labour pool at 168,288 in February 2014 and the latter measures is at 186,885 in March 2014.   The reason for this stark difference is that the former measures only those working or seeking employment that are registered with the ETC whereas the Labour Force Survey measures the entire labour force even those working or seeking employment without registering.   The stark difference is indicative of the size of the black economy.

On the inflation front it has become a limbo game of how low can you go. The retail price index for June 2014 shows a 12 month inflation rate of -0.10% and a 12 month moving average of 0.66%.   The Harmonised Index of Consumer Prices (HICP - which is the inflation measure used by the EU) shows a 12 month rate of 0.7% and a 12 month moving average rate of 0.8%.   The main difference between the two is that the latter includes restaurant and hotel prices which are largely excluded in the domestic retail price Index. The higher inflation measure of the HICP shows that the strength of the tourist season is permitting hotel and restaurant operators to punch in higher prices and consequently better profitability.

Is low inflation bad?   It is a virtue if set in the context of a growing economy like ours where the low readings are being driven by seasonally low food prices and lower energy costs as a result of government policy.    It could be a vice if set in the context of a stagnant economy as is the case in Greece, Cyprus, Italy and Spain where low inflation is accompanied by harrowing unemployment, though thankfully even there it would seem that things have started to stabilise and perhaps showing small signs of improvement (however from a very low base).

Turning to tourism, figures for the first half of 2014 show an 8.7% increase in the number of visiting tourists (with most of the growth in the non-EU non packaged holiday sector, including an 18% increase in visitors for business and professional purposes) a 7.2% increase in the tourist nights spent in Malta, and an 8.5% increase in tourist expenditure, with more spent on accommodation and other expenditure and less on flights.   It seems like a too-good-to-be-true story but as I said these figures can be confirmed by smell tests as we walk through the streets of Mdina, Valletta and Sliema.

On the Balance of Payments we have only the figures for the first quarter of 2014 showing a marked improvement in the already satisfactory position of the Current Account from Euro -117 million in March 2013 to  Euro -63 million.  The balance of trade statistics for the months of April and May 2014 continued to show marked improvement.   With the strength of tourism in the 2nd quarter one should expect a solid surplus in the services sector.  Ingredients are therefore set for a very healthy current account of the balance of payments position for the June 2014 quarter when this is published late in September.

Finally the government finance position up to June 2014 shows a slight deterioration over June last year.   For the whole year the Ministry for Finance projected an improvement so we have to see whether by the end of the year the trend of the first half  will be reversed to meet the full year Budget 2014 targets.  In the first half to June 2014 capital expenditure was running ahead of schedule so one expects some claw back in the second half.   Also revenues from the Investment Registration Scheme will be checked in the second half. All revenue items are running ahead of last year proving the strength of the economy which immediately shows up mostly in VAT receipts.  These were up by a smashing 12%.  

There is only one revenue line falling behind and this is Customs and Excise which is very much dependant on Enemalta finding cash flow to update its dues to government.   Hopefully with new share capital infusion Enemalta will be able to honour its obligations to the public purse in a timely fashion.

But all in all the mid-term assessment of Malta’s economic performance offers scope for optimism.  One hopes that the international scene with so many danger flashpoints (Ukraine, Gaza, Libya, Syria, Iraq amongst others, as well as the risk of spread of Ebola disease which is spreading in West African countries) will not be unkind in the second half we are currently sailing through.

In the absence of something more robust to criticise, government is being criticised for the process rather than judged by the results.   Rather than be satisfied that a Maltese person was liberated and safely returned to his family in Malta we argue whether or not he was abducted.   With the confusion reigning in Libya it may be difficult to distinguish between full scale abduction and a less stark version of it, once no demand for ransom was apparently made.

Rather than be happy about Chinese investment especially in our energy sector we argue whether the Minister’s wife who piloted the process is an ambassador or a trade envoy and whether her appointment followed the right process.  Results are more important than the process, even though the process must remain transparent. 

Countries like   UK, US, Australia, Canada, Denmark, Korea, the Netherlands, Sweden, New Zealand  are experimenting with performance budgeting  which involves moving from an emphasis on inputs, to a focus on performance, outcomes or results. Performance budgeting also tackles fiscal consolidation by ensuring that limited public funds are expended on public services that are of most value to the country.

Our conventional system of conventional line-item budgeting lends itself to performance weaknesses, including the lack of information on how efficiently the allocated funds were used.

I look forward to the day when evaluation is done by results not just by rigid adherence to the process.  And the results for the first half of 2014 look positive and promising.


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