Post-Covid economy: What to expect

Last Updated on Thursday, 25 March, 2021 at 1:15 pm by Andre Camilleri

Apart from facing a health crisis due to the Covid-19 pandemic, the world is dealing with establishing a balance between health and the economy. Although the pandemic might soon be over in health terms due to the much-awaited vaccines, the world, and indeed Malta, could face another issue: economic recovery. This newsroom spoke with two economists – GEORGE VELLA and J. P. FABRI – in order to get their comments as to what we should expect in the coming months.

Some are saying that post-Covid-19, the world is going to go through a recession. Do you agree?

GV: Yes, it is very possible that as a result of Covid-19 the world would experience a widespread recession. It might, however, be technically difficult to define as a recession. All worldwide economies have registered sharp contractions during the course of 2020 and possibly will do so in 2021 as well. Going forward, results of future years will be compared to these years and it will be difficult not to register growth when compared to these exceptionally low performances. If, on the other hand, comparisons will be made to 2019, expectations are generally pointing at the need for at least three to four years to make a full recovery to 2019 performances.   

JPF: It is all highly uncertain; however, I believe that the accelerating roll-out of Covid-19 vaccines in many advanced economies has set the stage for rapid recovery in the second half of this year and into 2022. Although growth in digital and digitally-enabled sectors will level out somewhat, high-employment service industries will ride a wave of pent-up demand. We should see a partial but sharp reversal of the K-shaped growth patterns that have emerged in pandemic-hit economies. Specifically, growth in highflying digital and digitally-enabled sectors will subside, but not dramatically, because the forced adoption of their services will be tempered by the resumption of in-person activities. At the same time, the sectors that were partly or completely shut down will revive. Major service sectors like retail, hospitality, entertainment, sports and travel will reopen for an eager public. Industries such as cruise lines will probably institute their own version of a vaccination certificate, with sales rebounding once customers are confident about safety. This return to previously closed consumption patterns, turbocharged by pent-up demand, will produce a burst of growth in depressed sectors, leading to improved economic performance overall. This is all dependent on the roll-out of the vaccination programme and any slip-ups, especially on a European level can derail the process of recovery.

Do you think Malta will fare well post-Covid?

GV: I would certainly hope so. The widespread support given by government, the relatively low number of job losses recorded so far, higher bank liquidity through increased savings and local investor confidence, which is still demonstrably strong, augur well for our chances of experiencing a speedy recovery. The impact that other factors, such as the possible profound adverse psychological effects that Covid will have on the local population and the negative impact of possible lengthy closures of schools, businesses, sports and leisure facilities, will have on consumer confidence is still very difficult to predict but will surely have a significant bearing on how Malta will fare after Covid.      

JPF: In Malta too, pent-up demand will contribute significantly to the overall economic performance. The key determinant is going to be the successful roll-out of the vaccination programme which will shore up confidence in consumers to resume in-person activities. However, the fate of businesses will also be critical to this. There is no doubt that there will be a good number of companies that might not survive this phase and the economy will adjust to some setbacks. However, with the right support mechanisms, the shock should be absorbed. Having said this, the situation remains largely uncertain and risks still prevail but a level of cautious optimism should also be based on the pent-up demand that is slowly building up.

Should banks continue offering moratoriums, and till when?

GV: Banks have registered growth in profits for a long number of years – irrespective of whether the local economy was growing at a fast pace or not. Some contend that some of these profits were registered at the expense of local businesses. It is now time for banks to show their commitment to the sustainability of the local economy. It is, on the other hand, imperative not to forget that a strong financial sector is the cornerstone of a sustainable and robust economy. So it is important that the moratorium programme is extended as long as possible without putting the banks’ finances in jeopardy. I do believe that local banks are strong enough to withstand further extensions of this programme.    

JPF: Moratoria are supporting a number of families and companies that are experiencing cash flow shortages and this support measure is actually critical for economic actors to survive and also stabilise their position. The transitioning out of moratoria is equally important and banks need to ensure that the resumption should be staggered or phased until people and companies regain their cash positions.

Given that government had to take a lot of money out of his ‘war chest’, do you think that taxes will be introduced?

GV: It all depends on whether and how fast we manage to recover. One could possibly envision a situation where the economy would return to the growth rates experienced in the last decade which would possibly save us from having to increase taxes. So let us all hope and focus on strengthening employee productivity and economic growth and we could possibly avoid having to increase taxes to pay for the extraordinary expense incurred during Covid.   

JPF: Data shows that government’s outlays have increased significantly over the past few months to support the economy at this needed hour. The economic recovery should also support government revenues in the future as the increased economic activity will generate tax revenue. Debt requirements will also increase to finance this position and fiscal management will be key. Rather than increasing taxes I believe that there is room for improvement in tax collection and in reducing tax leakage. Effort should be made on those areas rather than increasing taxes as the latter can dampen economic activity.

Even though Malta is doing relatively well in terms of vaccination, the rest of the EU is facing a very slow roll-out. How will tourism be affected during the summer?

GV: I am afraid that tourism this year is not going to be as strong as we all wish for and this will surely have a widespread and deep impact on the performance of the rest of the economy.

JPF: It is expected that tourism will be correlated to the roll-out of vaccines. There is no doubt that a slow roll-out in European countries will negatively impinge on Malta’s tourism. As things stand, the summer season is already very hard to recover and Malta should start looking at the second half of the year as a re-launch of the local tourism market and here the role of niche tourism can play an important element.

Is there anything you would recommend to government?

GV: The MDB CGS scheme, despite having been a very effective scheme, will soon need to be restructured. In normal times it is never sensible to provide medium- to long-term loans to companies to pay for their losses and working capital requirements. But during the extraordinary times of Covid, Malta had to resort to extraordinary measures and the MDB CGS scheme was one of the main tools used. Had we had more advanced and established private equity structures we might have been able to provide more equity-based solutions that could have been more suitable for the issues at hand. I, therefore, hope that the MDB who is the National Promotional Institution of the European Investment Fund in Malta becomes a key facilitator of the infrastructure we need for the introduction of the much-required equity products that could help restructure the funding set-up of the adversely-affected businesses and others who have ambitious growth plans. This could, in turn, help in resolving any issues that extending the moratorium programme (proposed above) might cause to local banks.

JPF: As much as short-term strategies are needed and necessary, I believe that in the medium- to long-term Malta requires a national vision, which will chart the future of Malta’s economy and sectors. It is time that as a country we have a holistic vision for the country rather than having siloed or fragmented sectoral sectors. Business leaders remain committed and positive about Malta’s future prospects and are ready to invest and transform their businesses. However, a national vision will help direct the economic future of the country and will more importantly address key challenges and reap opportunities available to the country.

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