Business and consumer surveys: Even before COVID, economic sentiment had already weakened

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Even before the COVID pandemic took the whole world by storm, economic sentiment in Malta had already weakened.

This emerges from the Business and Consumer surveys elaborated on data from the European Commission published last week in the Central Bank of Malta’s Quarterly Review.

During the fourth quarter of 2019, the Economic Sentiment Indicator in Malta pulled back to marginally below its long-term average of 100.0. It averaged 99.7, down from 101.5 in the preceding quarter. As a result, the overall ESI indicator remained below that in the euro area, which averaged 100.6.

Confidence weakened across most sectors, with the strongest decline being recorded in the retail sector. Meanwhile, sentiment in industry remained broadly unchanged. Nonetheless, when accounting for the variation in the weight assigned to each sector in the overall index, it appears that the deterioration relative to the third quarter was driven in almost equal measure by the retail, industry and services sectors. Furthermore, the evolution of sentiment in industry and services largely explains why the overall ESI has fallen below its long-term average in recent quarters.

Confidence in the retail sector turns negative

Sentiment in the retail sector turned negative in the quarter under review. It stood at -4.5, down from 10.5 in the third quarter of 2019, thus falling well below its long-term average of 2.8.

The recent fall in sentiment was driven by firms’ assessment of business activity in the past three months and, to a lesser extent, by their expectations for the three months ahead. Meanwhile, the share of respondents that considered their stock levels to be above normal edged down marginally.

Supplementary survey data indicate that, on balance, orders expectations were marginally nega­tive in the quarter under review. In contrast, price expectations stood more negative.

Industrial confidence remains broadly unchanged

Confidence in the industrial sector remained negative in the quarter under review. It stood at -7.0, broadly unchanged from the -6.9 recorded in the previous three-month period, but slightly below its long-term average of -3.2. A smaller share of firms reported falling orders. At the same time, production expectations improved marginally. These developments were offset by a larger share of firms reporting above normal stocks of finished goods. Additional survey data show a decrease in the share of firms anticipating falling prices.

Confidence in the services sector edges down

Confidence in the services sector remained somewhat below its long-term average of 22.9. It stood at 18.1, marginally down from 19.3 in the preceding quarter. Lower sentiment was driven by weaker demand expectations in the coming months and, to a lesser extent, by respondents’ assessment of the business situation over the past three months. In contrast, their assessment of demand over the previous three months improved further.

Supplementary survey data indicate that a higher share of respondents anticipated an increase in prices over the same period.

Confidence in construction eases but remains positive

In the fourth quarter of 2019, confidence in the construction sector eased to 21.2, from 26.1 in the previous three-month period. Notwithstanding this decline, sentiment remained well above its long-term average of -11.9.

Survey results show that lower sentiment was primarily driven by a fall in order book levels, although short-term employment expectations also weakened.

Supplementary survey data indicate that, on balance, the net percentage of firms reporting positive developments in building activity during the preceding three months decreased signifi­cantly. Meanwhile, labour shortages remained the main factor limiting production and were slightly more pressing than they were in the third quarter. Furthermore, a slightly lower share of respondents anticipated an increase in prices in the next three months.

Consumer confidence declines

Consumer confidence edged down during the quarter under review. It eased to 4.3 from 5.9 in the third quarter of 2019. Although it stood above its long-run average of -11.5, it remained well below the record high reading reported in the first quarter of 2018.

Consumers’ expectations of the general economic situation in the 12 months ahead were the main driver behind the latest fall in sentiment, as these were less positive than before. Similarly, consumers’ assessment of their past and future financial situation softened. By contrast, expectations of major purchases over the next 12 months were less negative in the quarter under review.

Supplementary survey data suggest that, on balance, a smaller net percentage of respondents expected unemployment to fall in the months ahead. At the same time, a larger share of consumers expected an increase in prices over the next 12 months.

Employment Expectations Indicator increases

Despite the loss in confidence signalled by the ESI, the EEI – which is a composite indicator of employment expectations in industry, services, retail trade and construction – edged up. In the fourth quarter of 2019, the latter averaged 100.3, up from 96.9 in the third quarter and close to its long-term average of 100.0.

The improvement in employment expectations in the quarter under review reflected more upbeat employment expectations in the retail and industry sectors, which outweighed softer employ­ment expectations in the services sector.

The EEI suggests that overall employment prospects were broadly in line with their long-term average, as below average prospects in services were counterbalanced by above-average recruitment plans in the other sectors of the economy.