Economist warns: Coronavirus could be Malta’s Great Depression

Malta will very likely experience its own ‘great depression’, banking and finance expert Prof. Joe Falzon, of the University of Malta, has warned of the coronavirus crisis that almost shut down the island’s economy.

In calculations of the scale of unemployment that might occur in Malta unless government does not step in with substantial wage relief, Prof. Falzon estimates that 55,000 people could potentially be laid off or experience drastic reductions in their salaries: 33% of all persons employed in the private sector (164,436), and 26% of all gainfully employed in Malta (212,046).

“Malta, like most of the western world, is very likely to experience another great depression. A 26% decline in employment and income implies that our GDP will shrink from €13.2 billion to €9.7 billion in 2020 – three billion euro on an annual basis. If the coronavirus effects will last six months, the reduction will be half this figure, €1.7 billion,” Prof. Falzon told this newspaper.

And the decline in GDP will not occur uniformly across all sectors. Some sectors, like accommodation and food service, wholesale and retail, and arts, entertainment and recreation, will see their sector sales revenue decline very rapidly, forcing vast lay-offs. The government itself will see big reductions in income tax revenue, national insurance contributions and VAT, probably also close to a 26% reduction on an annual basis.

Analysing the gainfully employed in the private sector in all 21 groups, Prof. Falzon assumed a probability of expected redundancies in each sector that might be laid off or suffer reductions in income.

“The Great Depression taught us that only massive monetary and fiscal stimulus can help to recover slowly the economy to its former levels of economic activity”

He carried out the exercise after hearing what he said was worrying note from the USA’s Treasury Secretary, Steven Mnuchin, who said that if things get much worse in the United States due to the coronavirus, unemployment could reach 20% in the United States. It was only in the 1930s during the Great Depression that the US last saw unemployment levels reaching 25%. Now stock markets have tumbled heavily in the United States and Europe in the last four weeks, forcing the Federal Reserve to reduce its benchmark interest to almost zero, and injecting billions of dollars as liquidity in the banking system. The European Central Bank and Bank of England followed with similar significant schemes to improve liquidity in their respective banking systems.

“Mnuchin’s statement got me thinking about the possible effects of the coronavirus on income and employment in Malta. I looked at the GDP data from the National Statistics Office, and found that several economic sectors are grouped together in the production account of GDP. Then I looked at the employment figures and found that these are very detailed into 21 different sub-categories of all the different industries in Malta.”

Prof. Falzon assumes that the public sector will not lay off any workers in this coming crisis, and somehow, all public sector employees will continue to receive their monthly pay-cheque. “Hence the 47,610 employees in the public sector will not lose their jobs. However, some parents might decide to work on reduced hours to take care of their children while at home. This will probably reduce their income from their full-time employment.”

In his calculations, Prof. Falzon suggests that the accommodation and food service sector will suffer a 90% redundancy; the wholesale and retail sector, 80%; the arts, entertainment and recreation, 80%; real estate activities, 60%; transport and storage, 30%; most sectors like construction, information and communication, finance and insurance, professional, scientific and technical, administrative support services, education, and human health and social work will suffer only 10% redundancies. Manufacturing will have a 5% reduction and other services a 20% reduction rate. The basic services sector like agriculture and fisheries, quarrying, electricity and gas, and water supply, sewerage and waste management, will all suffer no reduction rates.

“These probabilities of expected redundancies for each sector are subjective... constituted bodies and unions have their own estimates of any possible unemployment rates in each sector of the Maltese economy. These expected rates of redundancies can be continuously monitored and updated as the coronavirus effects will become more serious over time.”

Prof. Falzon says Malta can only stave off the lay-offs by planning in the same way the United States had done during the Great Depression.

“The commercial banks also need to offer liquidity measures, with very low interest rates, to all businesses in difficulty”

“Constituted bodies and the unions in Malta are asking the government to intervene in this time of unexpected crisis. The Great Depression in America in the 1930s taught us that only massive monetary and fiscal stimulus can help to recover slowly the economy to its former levels of economic activity.

“The ECB has already intervened with a massive injection of billions of euro to keep the banking sector liquid and afloat and avoid another banking crisis like we had in 2008. The governments in the EU also need to put massive injections of fiscal measures to directly help all the sectors which will be heavily impacted by this coronavirus.”

Earlier this week, Goldman Sachs predicted massive second GDP quarter decline of 24% in the USA, with a 12% increase in the third quarter. In the UK, Prime Minister Boris Johnson announced he will pay 80% of wages for retained workers for up to £2,500 a month.

“This is a time of national crisis where all sectors need to come together to help each other in the spirit of national solidarity. The government, constituted bodies and the unions, need to come together and find a national solution to prevent the massive expected layoffs that will happen soon in several sectors of the economy. The commercial banks also need to offer liquidity measures, with very low interest rates, to all businesses in difficulty. And hopefully, the general public will fully cooperate with the health authorities to contain the virus from spreading much further.”