Reports: Presenting the facts

In the last weeks a number of interesting reports were issued underscoring various economic themes that this column has also been highlighting.

The first report is the latest Business Dialogue, issued by the Central bank of Malta, at the beginning of this month. This report included a brief analysis of responses the Central Bank gathered with regards the commercial office space rental market and in its analysis it concluded the following: “Real estate agents and developers highlighted that the supply of commercial office space has exceeded demand, partly due to changing work habits post-pandemic and potentially less foreign direct investment… The challenges with the oversupply of office space, seem to highlight the misalignment between pre-pandemic investment strategies and current market demands. Real estate agents confirmed that this caused rent prices for such spaces to fall, in order to close the gap between demand and supply. Moreover, some agents highlighted that new commercial spaces will soon enter the market and thus could have more severe repercussions on commercial rent prices… Real estate professionals have stressed that the commercial segment has slowed down, attributing this to both an oversupply and the pandemic-induced shift in working patterns. Contacts in this sector highlighted that investments made by developers in recent years have led to a significant surplus in office space, which has not been matched by demand, despite continued strong growth in employment, which could indicate that job creation in sectors that usually demand office space may contain a higher element of telework. Company replies also hint that teleworking has allowed some firms to tap into a larger pool of labour supply by hiring workers that offer services from overseas. Should this practice become more widespread, it could have more significant consequences on the demand for office space.”

It is clear that we cannot defy simple economic principles and so if the supply of commercial office space keeps increasing and not matching demand it is obvious that certain investments will not make sense. This reminds me of a likely similar situation we will face when it comes to bed supply with regards tourism.

The second report is the Assessment of the 2023 Annual Report, issued by the Malta Fiscal Advisory Council. This report issues the following recommendations based on its economic review analysis. I am reporting these recommendations in toto as they are very much in line with various recommendations that have been made in the past by the IMF and the European Commission:

• “That Malta’s economic growth should continue to be export led, with less dependence on the domestic drivers of economic growth, especially private consumption. This requires further efforts to ensure a strong competitive position, through labour productivity increases, particularly by addressing skills gaps.
• Considering the recent research carried out by the MFAC and the update provided in this report, it is recommended that firms channel excess profits into productive investment and towards enhancing labour productivity. This will not only enhance competitiveness, but also strengthen the country’s capacity for sustainable economic growth.
• Government should avoid inflating government spending, to ensure adherence with the benchmark fiscal expenditure path. Whilst means of expenditure restraint should be explored, productive capital expenditure that promotes medium to long-term growth should not be curtailed. Rather, the Council encourages the government to preserve nationally financed public investment and improve its efficiency and effectiveness. The effective absorption of RRF grants and other EU funds, in particular to foster the green and digital transitions, should also be ensured.
• Fiscal consolidation should ensure that the required fiscal effort is achieved. Indeed, the structural adjustment must be more than the 0.4pp of GDP recorded in 2023, given that in an Excessive Deficit Procedure, a country must realise a minimum annual effort of 0.5pp. The government should also consider targeting a larger effort than the minimum required, particularly while in a high economic growth environment, in order to build fiscal buffers.
• Although GDP growth was significantly higher than the forecasts for 2023, government revenue was not as responsive. The elasticity of both direct and indirect taxes to GDP growth was at low levels when compared to the previous 10 years. The government ought to explore the reasons for such occurrences and take any necessary actions.
• It is important to maintain the buffer achieved below the 60% debt benchmark and monitor the various components contributing to changes in debt, particularly interest expenditure and the level of stock-flow adjustment. The latter exhibits considerable volatility and over the past years has turned out rather different than forecasted. 
• The MFAC reiterates its recommendation to prepare an adequate exit strategy in relation to the fixed-energy-price policy, adopting a more targeted approach and enhancing incentives for energy savings.”

I believe any further comments on the above crystal-clear recommendations would be superfluous. Ignoring these recommendations would be a grave mistake.