Update 3 | Recession worries as economy registers two negative quarters of growth

Updated at 1:21pm with comments by Labour MP Karmenu Vella; Updated at 1:41pm with Joseph Muscat tweet. Updated with statements from Michael Briguglio, Alfred Mifsud, and Edward Scicluna.

Provisional estimates indicate that the gross domestic product (GDP) for the first quarter of 2012 amounted to €1,556 million, an increase of 1% compared to the corresponding quarter last year.

But in real terms, GDP decreased by one per cent -  household consumption fell by 4.4% in the last quarter compared to the same quarter last year. but government spending had increased by 10% (q1:2012 compared with q1:2011). Additionally, the NSO data states that exports in the fourth quarter of 2011 increased by 3% (compared to the same quarter in 2010), and by 0.79% for the first quarter of 2012 (compared to the same quarter in 2011).

There was a major fall in wholesale and retail trade, a broad category that also includes motor vehicle repairs, transport and storage, accommodation and food services, which fell by 20% in the fourth quarter 2011, and again by 7% in the first quarter of 2012.

The rate of growth overall fell from 4.8% to 1.6% in the fourth quarter of 2011, and to 1% in the first quarter of 2012.

Prime Minister Lawrence Gonzi told The Times "there was no denying these were challenging times" and that Malta was reliant on exports, but past results of growth and investment were encouraging.

Opposition leader Joseph Muscat tweeted his initial reaction, saying Labour had the credentials to take decisions to generate growth.

An economy in recession,again,needs sound decisions focused leadership steering it towards growth. PL team has the credentials to deliver-JM — Joseph Muscat(@JosephMuscat_JM) June 8, 2012

In another statement, Alternattiva Demokratika chairperson Michael Briguglio said it was becoming increasingly evident that Malta's economic model was over-dependent on unsustainable models, such as overreliance on construction.

"It is true that Malta cannot avoid certain economic problems such as those generated by the global economy, given its small size. But at the same time, bold decisions must be taken to ensure the economy does not go into further trouble in the years to come."

Briguglio said Malta should adopt a 'green new deal' to generate high-value added sectors of green jobs in alternative energy, IT, education, caring services, research and environmental services.

"These should be given priority over others characterised by speculation, such as construction for real estate. As of now Malta should read the writing on the wall on dirty energy from oil and the reckless use of water. Fiscal measures against waste of water and against vacant properties, from third vacant property onwards, should couple progressive taxation, so as to avoid a deficit upsurge."

Cautious about the recession

In a first reaction, Labour MP and spokesperson for finance Karmenu Vella said the latest data from the NSO were a stark contrast to government's assurances on Malta's economic performance.

But Vella also sounded a note of caution. "We shouldn't dramatise the issue, but we shouldn't take this quite as lightly as the government tends to either."

Vella played down concerns of a full-blown recession, emphasising that figures alone could neither confirm nor deny a recession. "But what is certain is that the [economic] reality is far different from what government is trying to make it out to be," he said.

He added that government's assurances on Malta's economic performance have long been at odds with what families are experiencing "on the ground".

"There is a sharp contrast between the heaven that government is promising, and the purgatory that is being experienced by families," Vella said. "But the gap is however closing, as the figures coming from the top are starting to reflect the reality being experienced by families."

Vella attributed the consistent negative growth GDP to three factors. "Firstly, the government's economic growth targets are not realistic, leading to unrealistic economic programmes as a result. Secondly, the government is consistently ignoring the advice and suggestions from the Opposition, but also from other institutions such as the International Monetary Fund (IMF), the European Commission, and the Central Bank."

Vella added that the government was not addressing the economic instability undermining the country's performance. "Government is not addressing the concerns of those trying to support the economy," he said, pointing to concerns by large companies of limitations on growth and expansion.

Again, Vella reiterated his note of caution. "It is not all doom and gloom. There are certainly aspects of the economy that are doing well, but on the whole there are more that are not doing so well."

On his part, Labour MEP Edward Scicluna said a cursory look at the GDP statistics provided a very murky picture of what is going on. "There is a stated 'error' between the three methods of GDP measurement of about €135 million, so it's hard to get a clear picture. What's clear is that consumers are holding back from spending more than their incomes allow them. While their nominal incomes increased by 3%, their consumption fell by 3% in nominal terms. Profits overall fell too though taxes increased substantially.

"Sector-wise it looks like incomes in the financial sector have reached a plateau over the last year. The 'productive' sector which includes manufacturing fell significantly. The overall export sector managed to hold its real value over the year and perhaps increased marginally in real terms too."

Deeper recession fears?

Former Mid-Med Bank chairman and economist Alfred Mifsud said news that Malta had entered a recession did not come as a surprise, and was unequivocal about the NSO figures' reliability:

"The figures speak for themselves. Either we believe them consistently - in this case also - or we do not."

Whilst noting that Malta's negative economic performance was linked to the European financial troubles and the global economic slowdown, Mifsud said that the recession's timing is "particularly worrying."

Mifsud said the data suggests the shrinkage in the Maltese economy was taking place concurrently with an increase in government expenditure. "This could be actually hiding the real depth of the recession that Malta is in.

"Despite government's expenditure during that time, the overall economy gas contracted nevertheless. This means the private sector has contracted even more," he said, because government spending was mainly in the public sector.

"This is worrying because it is the private sector that earns the real money," Mifsud said. "This suggests that the [recession's] real depth is bigger than what the figures are suggesting and that government spending could have 'inflated' the country's economic performance."

Compared to the corresponding quarter last year, GDP at current prices increased by €14.8 million, and is estimated to have been distributed into a €23.7 million increase in compensation of employees, a €26.5 million drop in gross operating surplus of enterprises, and a €17.7 million increase in net taxation on production and imports.

During the first quarter this year, growth in gross value added was generated in professional, scientific and technical activities; financial and insurance activities; public administration and defence; compulsory social security; education; human health and social work activities; arts, entertainment and recreation; repair of household goods and other services; information and communication; and real estate activities.

A drop in gross value added was registered mainly in mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities. Other drops were registered in the wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities; agriculture, forestry and fishing; and construction. Total final consumption expenditure in nominal terms went up by 0.6 per cent and down by 0.9 per cent in real terms.

Gross fixed capital formation increased by 5.5 per cent at nominal prices and by 5.1 per cent in real prices. Real exports increased and real imports declined.