Shoulder to Shoulder – we can get out of it sooner

 By Vince Farrugia *

There's a lot of bad news on the business front. But it is not really all that bad. An interesting set of statistics came out of the G20 meeting held in London last week. It shows who's faring most badly and who's feeling that things are changing.

The Japanese appear to be in the worst shape of all. Japan's gross domestic product will this year go down by 6.6%, below zero, and by 2010 it will remain at -0.5%. Germany is also faring badly. It looks like 2009 will be closing at -5.3%, however it is believed that the green shoots of growth will appear in 2010, albeit at a meager 0.2%.

Italy will also do badly this year. They are moving to close the year at a GDP of -4.0% and will remain under the water in 2010 at -0.4%. The US will also suffer a -4.0% drop in GDP this year but is looking forward to at least a 0% growth rate in 2010. Britain, who before the G20 was considered to be the sick man of Europe, will end the year at -3.7% GDP and will still not see any green shoots in 2010, staying at a growth of -0.1%. France does slightly better with -3.3% GDP for this year and -0.4% in 2010. Canada will be another lucky country that will see the beginning of positive growth with -3.0% for this year and a positive 0.3% growth in 2010.

Depending on how one sees the world, these figures may be taken as positive for next year and dismal for this year. Those of us who were reading the right (as it turned out) economic books, are not so shocked at the figures for 2009. The indications of those who last year were called the professors of doom were that the leading economies would be in an even worse shape and they surely were not projecting that 2010 may, for the USA, Britain, Germany and Japan, close to something near 0% growth rather than further a down-slide. So overall this is not a bad scenario compared to expectations.

In the European Union, many economists where caught on the wrong foot. I listened, attentively last October and again in November last year, to the leading economists of the Maltese Government and was shocked to learn that the figures they were working on in the Economic and Financial Committee (EcoFin), the EU Commission's economic top brass, were still based on growth prospect for 2009. I was even more shocked however when the Budget 2009 was announced in the first week of November 2008 and heard the Minister of Finance Tonio Fenech say that he's basing his work on a 2.5% GDP growth for 2009.

First of all one should note that the Maltese Economy, in spite of all our efforts, has over the last 10 years grown at an average rate of 1.9%, which is more or less the same rate (2%) of the 15 leading EU economies during the same period. For this reason, no economist could have predicted that as the EU economies go down Malta could really get the chance to out pace them. Secondly, I believe that at EcoFin they had more down to earth facts and figures to know already, in November 2008, that things were pretty bad. Even if the EU economists did not take head of stern warnings and econometric scenarios, presented by leading star economists like Profs Roubini of New York State University, but the indications emerging from what was happening in the financial markets were already very close to home in Britian, Brussels, Frankfurt, Amsterdam and in Paris.

The U.S.A as usual sprang quickly and took action. The E.U Commission, and now what we are calling the G20, bringing together leading economies from all over the globe, are also taking action.

Practicing economists know that more is needed, but the first strong interventions by the USA, Britain, EU Commission and Japan are already having an impact. The worst may not be past though. A US $5 trillion fiscal stimulus as announced at the end of the G20 is a lot of money, nearly a tenth of global GDP. None of it is really new and most is coming from the so called ‘automatic stabilizers', that is the natural way that government financing works, where governments receive a lot of revenue when the economy is growing so they effectively mop up the extra moneys that may cause inflation and the resulting problems, and for state revenue to go down when the economy is down and therefore governments appear to be funding the economy exceptionally.

More impressive, however is the G20's success in building a $1.1 trillion package which is independent of the fiscal stimulus. The international monetary fund is trebling its available resources from $250 billion to $750 billion, with $250 billion additional reserves in the form of special drawing rights. All this means that the world emerging economies will be assisted not to fall under during the worst and most damaging phase of the recession.

The figures go along to prove that America and the leading economies are not ready to let the world economy sink and then expect it to rise again some years forward into the future. If that were to happen many economies would have gone under and the effect on employment in all countries would have been disastrous. One wouldn't have been able to imagine what political upheavals this would have brought about.

The world has now been used to years of non-stop growth and political and economy stability in most of the leading countries. We in Europe have enjoyed the longest period of economic growth and stability ever known. We in Malta have enjoyed 20 years of unparalleled growth. The stability made us all take so many things for granted. We hardly realized how much in fact did change. The Maltese economy up to some years back depended on textiles, the dockyard, British tourists, certain leading industries, large state corporations and government employment. Today what sustains the economy are private enterprises. Malta's economy is essentially an enterprise-driven economy with the private sector responsible for practically all economic activity. The drydocks is a small part of the economy, textiles are gone, new private investment in new areas like electronics and pharmaceutical dominate the export scene. Tourism is a completely different package from what was constant up to 10 years ago and most of the hotels and accommodation facilities are new. New and privatized are the airport, the Freeport, telecommunications, the Banks and the port. Retailing and trading has been transformed with larger and more intensive investments. Even Government's approach to the economy has changed completely.

The impact of the world economy remains strong. Indeed we still have to restructure more, so that we can become less susceptible to world events. New business keeps flowing in the form of finance, gambling and insurance companies, but above all Smart City. The general picture is one of constant transformation.

We have learnt also how to react to world events. The task force which is currently working behind the scene to help enterprise face the world turmoil is doing excellent. Everyone involved is trying to hold the danger away from our shores. This is in the right spirit.

The recession is not over. The world job market remains weak. In Malta the job market is holding on. It is important government and state bureaucrats understand that enterprise – large, small and medium – is facing problems and that we together can force the economy to grow again and sustain each other as other economies fall back.

The indications are that if we all put our head to it, we can win. We can foment division among ourselves, and argue on silly issues that have nothing to do with the real national challenge, but that of beating the recession, so that in 2010 our economy will be one of those that will start growing again, is the real, top-most urgent issue. Those who are not seeing this so clearly, have their head examined. When the storm is over those who now seek to divide will be left as bitter losers.

When the economy starts growing again we will all recognize those who when the going was though, they shouldered the burden. Yes shoulder to shoulder we can get out of it sooner.

Shoulder to shoulder to face the storm and win.

*Vincent Farrugia is a candidate for the European Parliament Elections on June 6, 2009 for the PN/EEP-DP