Silvan Mifsud is director of Advisory at EMCS Tax & Advisory
I always knew that in general the Maltese were an insular kind of people. However many times I am still surprised as to how insular we are. It could be that we find comfort in focusing on internal events and issues or it could be that we believe that since we are a tiny nation we expect to dodge every bullet and not be effected by what is happening around us.
Reading the latest global economic reports and news shows that we are still in the middle of troubled waters. The latest IMF global outlook report, just published last month, outlines that global economic growth is projected to fall from an estimated 3.4% in 2022 to 2.9% in 2023 and then possibly rise to 3.1% in 2024. This forecast for 2023 is 0.2% higher than predicted in October 2022. The rise in interest rates to fight inflation and Russia’s war in Ukraine continue to weigh on economic activity, while the rapid spread of Covid-19 in China dampened growth in 2022. On the other hand, the recent reopening of the Chinese economy has paved the way for a faster-than-expected economic recovery. Global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, still above pre-pandemic (2017-19) levels of about 3.5%.
Taking all things together, the balance of risks remains tilted to the downside. On one side recent economic data from various economies indicated a higher demand than expected and in some cases a faster fall in inflation. However, all this is highly dependable on the health outcomes in China, which could hold back the recovery, and Russia’s war in Ukraine.
So all this means that we are still in troubled waters, with a mixed bag of situations. On one hand we have the US economy which seems to be slowing down gracefully, as it logged a better than expected growth in the final quarter of 2022, even as the Federal Reserve’s aggressive campaign to raise borrowing costs began to weigh more heavily on business activity, with a growth of 2.9% on an annualised basis between September and December, this being slightly higher than economists’ forecasts being at a 2.6% increase. That marked a slowdown from 3.2% growth in the third quarter. On the other hand, we then have Germany, whose economy has unexpectedly contracted by 0.2% in the final quarter of 2022, as high gas prices squeezed demand and placed the eurozone’s manufacturing powerhouse on the brink of recession. The German figures raise the prospect of the region’s largest economy recording two quarters of negative growth, thus meeting the technical definition of recession. Fears of a recession had eased earlier this month, when officials said the economy was likely to have stagnated, rather than shrunk, in the fourth quarter.
So what does this all mean for businesses in Malta? In essence it means one thing – that businesses need to sharpen their pencil and I will use the latest news from Ryanair to illustrate how.
On Monday, 30 January, Ryanair reported a profit after tax of €211m for the three months to the end of December 2022, against a loss of €96m a year ago. The results were a record and came after particularly strong demand over the October to the peak Christmas period. This is when passengers paid fares which were 14% higher than in the comparable quarter three years ago, before Covid-19 struck. Ryanair said on Monday it had driven down its unit costs in the fourth quarter to €30 per passenger excluding fuel and that its planes were 93% full over the period. In contrast such positive and strong performance from Ryanair came just after yet another airline, this time the UK airline Flybe, collapsed into administration, leaving thousands of passengers stranded. This means that the failure or downgrading of routes, serviced by weaker airlines, is opening up significant opportunities for Ryanair, as it keeps attracting passengers through comparatively cheap fares as it manages to keep its own costs low and filling their planes.
I believe the message outlined in the business model of Ryanair is simple. Businesses need to make sure that they change and transform themselves to become more efficient. To do so they need to rely on effective corporate governance structures, the latest data and insights and a clear strategy. The time for sloppy and amateurish running of any business or a business-as-usual attitude, hoping things will still be fine, are well over.