The economic recession is over, but the Maltese economy is still fragile. Statistically we are out of it but economically we are still stuck. GDP has grown ahead of what it was in 2008, when the recession started, so at macro level we can say that we are out of the woods. We still cannot say this however at the level that matters most for the majority of our enterprises. At micro and small enterprise level, and at household level, the recession still bites. Purchasing power of consumers is still too weak. The registered growth is fragile.

In general terms, the economic sector that has moved the economy away from the recession is a particular one, identified statistically as Financial, Personal and Business Services. We are here referring to the commercial banks and the other financial service providers like insurances and financial management firms, personal services like e-gaming and professional business services like business consultants, auditors, accountants, brokerage firms and other professional services to business. Compared to the period before the recession commenced in 2008 these sectors leapt forward so that they are now close to 30 per cent of the economy. While these sectors together with the public sector, as a result of the wage increase enjoyed by all government employees, pushed the growth registered in total economic value added, all the other sectors effectively grew smaller. This is true for manufacturing, transport and communications, hotels and restaurants, construction, and wholesale and retail. The enterprises where most people work are down and still in recession, but the people in financial services, e-gaming and professional services to business, are doing so well that they have moved the total economy forward. Yet in spite of the recession, the economic sectors that employ most employees and who receive practically no assistance at all continued to sustain their employment levels, so much so that in the last 10 quarters the Maltese economy increased its level of employment by 3.6 per cent while employment levels in the other EU member states contracted, on average, by 2.8 per cent

The point at issue is therefore, what recovery? Can Budget 2011 correct the economic course?

Households’ purchasing power is too low to sustain all enterprises operating on the local economic level. Action needs to be taken to boost household consumption. This is essential to sustain the vast majority of micro and small enterprises. In Malta, 99 per cent of enterprises are micro and small. We hardly have any medium-size firms and practically no large-scale enterprises. The last Small Business Act Fact Sheet published by the EU Directorate General for Enterprise shows that we are the economy, out of the EU 27, that is most dependent on micro and small firms, yet the government only gives one per cent of all state aid granted to enterprise to the 99 per cent of enterprises that are micro and small. On almost all of the 10 pillars on which the Small Business Act is built and on which performance of SMEs and micro firms is measured, Malta fares rather badly. Micro and small firms in Malta receive practically nothing in state aid as all the assistance goes to the one per cent of firms that are medium to large. Yet micro and small firms employ 77 per cent of all workers. Once one squeezes all the talk and all the promises made to these firms over the years the truth is that micro and small firms are left with nothing. Some pockets of small enterprises as in farming, fishing, tourism and some in Gozo and in other small sectors do get assistance but compared to all the others in a business community of 34,800 micro and small enterprises who get nothing, the situation is dismal indeed.

Household consumption on which these firms thrive had been rising steadily up to the third quarter 2003. Things started going wrong much before the economic crisis hit us in 2008. After 2008 growth in consumption dropped markedly and reached rock bottom by the second quarter of 2009. Household expenditure picked up again this year but it is still well below the levels of growth of the pre-recession period. While the politicians and the general public still talk of price inflation, the truth is that national statistics show that price inflation has moved with the flow of household consumption, which has plunged drastically from the high reached at the end of 2004 and down to figures, which in practical terms denote more a state of deflation than that of inflation. For retailers and service providers this is a depressed market. When people say that their disposable income is not enough to meet their consumption needs, the figures show that they are right. That is why retailers and wholesalers complain of falling sales. The problems in these sectors are acute because there is a ratchet effect in that most shops and service providers cannot reduce the number of workers employed or other costs so easily, as they are already on what is essential to keep the services to the community they offer. The stiff competition in the market today keeps them cost conscious so even in a depressed market there is little cost cutting they can effectively do. Indeed, most costs have shot up and it’s not just electricity tariffs and wages but practically all other government and public sector induced costs.

Normally, in a recession, public expenditure moves up to rebalance the drop in private expenditure. The government kept its expenditure steady so the loss in private consumption was not remedied by a government suffering from reduced revenues from businesses due to weaker economic performance of enterprises even though the role of public consumption in the economy appeared to grow. The wholesale and retail sector today employs 26,500 people in full time equivalent jobs with a value added per employee of €19,732 compared to the tourism sector, which employs 14,000 with a value added per employee of €16,000. These sectors could fare better if prices and volume of sales are improved enough to achieve an increase in profitability and in wage rates. The low value added per employee in hotels and restaurants reflect the depressed prices obtained in this sector, which in turn reflect the weak growth in the value added per employee working in wholesale and retail, because in the absence of growth in household consumption, this sector also depends on tourism spending. Economist Dr Gordon Cordina, in a highly appreciated exercise for MCESD, estimates that the retail and wholesale sector entered the economic recession even before the whole economy fell into recession and now it is not benefiting from the upswing in the total economy. The reason seems to be that the sectors and employees in those sectors that are doing well, people in finance, in gaming and in professional services, have no reason to upgrade their consumption expenditure in Malta as their earnings grow. It is a pattern of consumption behaviour that those who really make a difference on total private consumption movements, whether up or down, are the middle and lower income earners and not the higher ones.

The situation in the restaurant sector is even worse. GRTU surveys have shown, and this is also confirmed by studies conducted by Dr Gordon Cordina, that this sector was experiencing declines even before the global recession hit Malta. The situation is similar for firms in crafts and maintenances and in the garage industries. That is why, in spite of the overall growth of the economy, the micro and small enterprise sector continues to be depressed. Construction seems to be registering a bit of an upturn and operators in this sector are keeping their fingers crossed, while the public sector projects planned in the last couple of years now move from planning stage to actual construction and the much awaited Mepa reform hopefully dislodges the block of investments still held down by this regulator.

An essential measure in business confidence is profitability. Profits for most enterprises have been depressed and falling since much before the recession.  2010 is now beginning to show a marked improvement from the really depressed state profits registered in 2009. The way forward is increased profitability. It is extremely hard trying to convince the government to be more forthcoming towards micro and small firms. This is not Germany where the state organisations own one of Germany’s largest financial institutions geared specifically for the financing of SMEs, more especially the micro and small firm. Here there is no institution, financial or administrative, specifically geared to support and financially assist micro and small firms. The general economic climate in favour of enterprise has changed positively over the years but Malta still lacks real effective support of micro and small firms. The government has even dragged its feel in implementing the EU-approved Small Business Act. The pattern is that whatever is set up is soon removed. It appears that there is no real commitment. It happened to IPSE and again to the set up established by Edwin Vassallo. Now they are starting again under Jason Azzopardi and Malta Enterprise. The commercial banks do help; in fact most businesses would not have survived had it not been for the support of the banks. But they would not have been born either were it not for the funds of the initial owner or the backing of his family. Without sufficient collateral it is the same as it has always been, extremely difficult to start an enterprise in Malta. So profitability is essential for business growth and expansion. All promises made on easy micro credit and financial assistance under EU schemes is relevant only to the very few, and most of the promises are either not implemented or when implemented are made difficult enough so that hardly anyone, except the lucky few, gain anything.

Increased productivity and increased value added per worker employed is essential for sustained economic growth. SME support must be properly planned and genuinely geared to help micro and small enterprise. Labour participation rates in Malta are too low and as labour is our major resource, Malta cannot really expect to make a dramatic increase in GDP unless we make better use of all available human resources. Innovation and increased investment in technology is essential but labour remains the prime factor. Assistance for increased investment to push through harder on the road to turn Malta to the desired knowledge-based economy has to become real not just mere Budget Day promises. The schemes necessary to really make Budget 2011 different are available. We do not have to reinvent the wheel and they are not that hard and costly to implement. But the Minister of Finance and the Cabinet of Ministers must push much harder to change the negative attitude that so many top state bureaucrats and authorities have towards micro and small firms. The higher level of economic growth that we must achieve for Malta to be really out of the recession is possible. It is also possible to have growth generated by all economic sectors and not just the financial institutions, e-gaming and professional services to business. The micro and small firms operating in tourism, retail and wholesale, garage industries, services, construction and transport and entertainment can contribute much more if they are given the right support.  

Budget 2011 must make the difference that really matters. In Budget 2011 we expect smart moves geared at transforming the Maltese economy from the regulation-based economy that it has rapidly become to the one that is really desirable, an enterprise driven economy. In the absence of clearly defined and courageous actions our economy will remain fragile.

Mr Farrugia is director-

general of the GRTU (the Malta Chamber of SMEs) and one of two Maltese employers` group representatives on the European Economic and Social Committee