Inflation and confidence

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory and also a council member of The Malta Chamber

Eurozone inflation has fallen to its lowest level for almost two years. Inflation in the eurozone has fallen from a peak of 10.6% last year, with price pressures in the bloc have receded more slowly than in the US but faster than in the UK. After this latest data on inflation in the Eurozone, yields on German 10-year debt — the eurozone benchmark — fell 0.15 percentage points to 2.81 per cent. Many economists are signalling that  it is likely that the worst with regards inflation in Europe could be behind us, unless we get new shocks.  One has to see if this will mean the end of the interest rate increases by the European Central Bank.

As can be seen below, out of the last six months, from April 2023 to September 2023, Malta has registered a higher HICP inflation rate that the Euro Area, in four out of these six months. If one where to track the change in HICP inflation from December 2022 to September 2023, we see that for the Euro area the drop in inflation was on average of -0.5%  per month, whilst in Malta this was of -0.3% per month. This, in my opinion, highlights the importance of tackling inflation in Malta seriously and ensuring that policy decisions do not fuel inflation in Malta any further.

The latest Economic Update issued by the Central Bank of Malta indicates that in August 2023, the European Commission’s Economic Sentiment Indicator (ESI) for Malta fell to 102.5, from 107.7 in July. In month-on-month terms, sentiment decreased across all sectors. This Economic Sentiment Indicator is made up of various confidence indicators. In August 2023 the confidence indicator for the services sector fell below its long-term average of 19.6, decreasing to 5.7 from 23.5 in July. This was largely driven by a negative assessment of the business situation over the past three months. Moreover, confidence in the retail sector stood at 18.3, below the 23.5 recorded in the previous month, but still above its long-term average. This decline was due to the fact that retailers’ assessment of sales in recent months and their expectations of business activity over the next three months, stood less positive in the month under review. The confidence indicator for the construction sector edged down to -14.1 in August 2023, from -11.7 a month earlier, falling further below its long-term average of -8.1. The recent decrease in sentiment reflected a deterioration in employment expectations in the construction sector. The consumer confidence indicator remained below its long-term average of -10.2, standing at -12.8 in August, down from -11.8 in the previous month. The fall in consumer confidence sentiment was largely driven by a more negative assessment as well as expectations about their financial situation. Finally, sentiment in industry eased to 9.1, from 10.6 in the previous month, but remained well above its long-term average of -4.2. However, production expectations for the months ahead stood less positive compared with a month earlier.

In conclusion, it seems obvious that inflation is eroding business confidence across the board. This is why tackling inflation should be our top priority. The least we need is that we remain with a higher inflation rate that other European countries, whilst our economic performance remains dampened because of entrenched inflation expectations. Our Maltese economy would be like a candle burning at both ends.