Prognosis for 2017 economy

Any prognosis for 2017 must, of course, take stock of what happened last year and how international factors may influence our economy. As always, one hopes that the crystal ball works out a true forecast.

To start with, readers may recall how the deficit for 2017 is expected to be 0.5% of GDP, down from 3.7% at the end of 2012. This is great news as is the sharp drop in the number of jobless.  

The NSO reported 24,348 persons finding full-time employment in the three years up to June 2016, so one may congratulate the administration on creating more than double the number of full-time job opportunities registered in five years under the previous administration, albeit this administration was spared the pangs of a cruel global recession.  

It is interesting to note that while tourist arrivals reached a record in 2016, only 1,800 new jobs were registered in the hotels and restaurants sector. This compares with an increase of 3,100 in the gaming services sector. One may start to question the rate of return of the tourism sector, given that the revised subvention to the Malta Tourism Authority (includes assisting low cost airlines) reached €55 million in 2016.  

More grey clouds loom on the horizon as tourism arrivals will be facing uncertainties due to Brexit (the UK economy is gloomy), and the continued losses incurred by Air Malta, which now seems to have fallen out of favour in the proposed Alitalia merger deal. Air Malta employs an army of qualified pilots and technical engineers and, unless quickly restructured, it may face insolvency or a second bailout approved by the Commission.

The manufacturing and construction industries saw a minor rise in full-time employment despite the perception that construction is at its nadir due to the favourable policy by MEPA towards permits for large-scale projects.  

The increase in employment in the government sector to over 48,000 people is a drag on the exchequer for such a small island. One hopes that more private-public partnerships will in 2017 reduce this load.

The change in fiscal policy as explained in the 2017 budget bodes well for a more regulated expenditure while improving the GDP-to-debt ratio downwards to below 60% of GDP. Tighter control over public expenditure (sans new taxes) is good news but, as 2017 is the last year before general elections, one fears that pressure to turn open the taps will be inevitable.

A typical example is the drive to increase the minimum wage across the board as a pretext to satisfy protests from unions, Caritas and NGOs to fight against absolute poverty. Naturally one cannot ignore the warning by the Fiscal Council to explore desired fine-tuning of expenditure plans so as to better accommodate the requirements for the 2017 annual structural effort.  

The list of capital expenditure for next year is encouraging and if properly executed will improve the benessere of all citizens. This includes (among others) a call for the design, building and operation of the Gozo tunnel and a tender for a fast ferry service between Valletta and Mgarr. We may attract new iGaming companies if a new fibre-optic link is laid between Malta and Marseille, France, to reduce dependence on a hub in Italy. 

The cherry on the cake is the pledge to set up a new national oil company to kick-start our neglected drive on oil exploration, particularly in the Sicily channel, which is contiguous to rich oil bearing rock. The price of crude oil is now about double the low it reached in January and augurs well for any new investment in domestic exploration. 

The oil market has been driven to a large extent by OPEC’s decision to reduce output late last year. 

Turning to Europe, the Commission forecasts euro area growth of 1.5% and EU growth of 1.6%, which is less than the rate forecast by our minister of finance. 

The euro is facing difficulties due to political uncertainties this year but it might get through the year unscathed if Marine Le Pen is defeated in France’s presidential vote and Angela Merkel is re-elected in Germany. Italy may soon go to the polls and if it manages to secure a safe landing for its flagging bank sector and possibly see the return of the energetic Renzi government, then the future of the euro may stabilise.  

Economic growth in the US is expected to continue at a moderate pace following the election of Donald Trump; with the president elect’s mantra of “Making America great again”, investors are expecting superlative economic growth, higher inflation and stronger profits. 

They have invested heavily in equities and have a much lower-than-normal exposure to bonds. Expectations this year for the effectiveness of Trump’s fiscal policies are high. Surely change will take time amid resistance from quarters enjoying the status quo.

Surely it takes time for new policies to be implemented and especially grandiose public spending may be stalled by Congress. Indeed, it may well be that factors such as demography and sluggish productivity make it very hard to push US economic growth up to reach the target of 3-4% by the end of term.

Another agent of change is the interest rate hike expected this year as the Federal Reserve is rumoured to announce three rate increases in 2017. This will probably push the dollar higher and make other currencies including sterling and the euro look weaker by comparison and obviously render US exports less competitive.

Will 2017 usher in a general-equilibrium theory given the strong impetus Trump has promised to give to American business to withstand foreign competition from low cost countries in Asia and Mexico? 

The theory assumes perfectly competitive markets in the USA are made up of businesses that all set prices at marginal cost. It says that, in a competitive market, prices are a signal of the marginal value of goods to consumers as well as the marginal cost of goods to producers. In reality some industries will have a few number of large firms because of economies of scale. 

Such firms have enough muscle in the marketplace to sell above their marginal cost; they can also pay below-market wages, something workers are increasingly resisting, in a move to improve the minimum wage levels in 2017. 

Back home, 2017 heralds exciting times with the presidency of the Council of the EU and a lot of new challenges, spiced with heightened partisan bickering which is expected to be manifest over the media in the run-up to elections in 2018. 

Wake up, get out of bed and let the fun begin!

Again, wishing a prosperous New Year to readers.

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George Mangion is a senior partner of PKF audit and consultancy firm, and may be contacted at [email protected] or on +356 21493041.