The Malta Independent 18 May 2021, Tuesday

There is a flurry of pent-up demand post-Covid

Sunday, 18 April 2021, 07:02 Last update: about 30 days ago

Reading the latest edition of The Economist, one meets a positive projection of an explosion in domestic demand across the western world as retail businesses, real estate and the entertainment industry will be inundated with a surge of orders, once the pandemic restrictions subside. 

Economists generally use the term “pent-up demand” to describe the general public's return to consumerism following a period of decreased spending.  The idea is that consumers tend to hold off making purchases during a pandemic, building up a backlog of demand that is unleashed when signs of a recovery emerge.  

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This is an optimist view shared by many small and medium sized companies that have just sailed through a lockdown or a restrictive curfew which saw their revenues drop considerably.  The furlough schemes may have felt like a sick patient being fed nutrients through a drip bottle leaving it with little energy to wake up and start functioning in a normal way.  

Close to home, we read the recent commentary issued by the Central Bank of Malta confirming (as if this in doubt) that as a result of the pandemic, it estimated a contraction of 8.2% in 2020, in gross domestic product (GDP).

Boldly, it predicts that there will be a rebound this year and is expecting a healthy 5% growth followed by 5.5% in 2022, and 4.7% in 2023.  Certainly, nothing like the stellar growth reached in the “L-Aqwa Zmien” years so cherished by party apologists under the ex -Joseph Muscat administration.  A positive prognosis by the Central Bank is that 2019 GDP levels are to be recouped towards the end of 2022, conditional on the successful rollout of a vaccine in 2021.  

One may ask what contributed to this sudden economic contraction other than the decimation of the tourist sector there was matched with declining net exports.  Many point to a disruption in the global supply chain.  What was seen as the Cinderella factor is a severe drop in domestic demand.  Politicians tend to underplay the importance of local demand when they seek to placate the worried electorate that their jobs are on line.  

The main trust of the present administration was the maintenance of low unemployment and supplementing of a controlled wage subsidy. The latter was administered by Malta Enterprise and we heard frequent reminders that there are 100,000 (almost 50% of non-state employees) assisted in the furlough scheme.  

Definitely, as employers were subsidized under the scheme there were fewer layoffs although as can be seen later in this article there were segments such as retail and small manufacturing which were faced with acute cash flow shortage and laid off workers.  Again, in the case of employees which survived solely on receiving the furlough rate (since the employer had no income) it is debatable if JobsPlus should treat such workers as gainfully employed.  

Back to the issue of subdued domestic demand, an improvement can be compared to a fulcrum that is expected to positively start an economic Renaissance at the end of the year.  This could be a dream come true.  Politicians are keen to put the pandemic behind them and set the date for a general election (latest date July 2022).  Surely another critical issue is the havoc wrecked on our educational sector by the pandemic.  These facilities were battered by closing and re-opening of schools during the past year.  This issue needs to be properly addressed. 

It is obvious that for a nation with no natural resources, we all concur that our unique cohort of workers have to be trained to reach a higher level of prowess.  During the lull in productive activity caused during the 16 months of this pandemic, it was our duty to reap full advantage of idle time and use this for the training of workers.  

For many years, we had finance ministers promising us to give top priority to further education.  Since Independence, we clamour for a higher cohort of trained workers with skills involving science, engineering and maths (STEM) yet facts show that we have not yet achieved our targets in higher technical education.  

Each year, our political leaders share with us their sacred creeds to turn the island into a Utopia where they promise us to build a platform for collaboration between government, industries and individuals to train workers in cutting-edge technology.  It is true that we invest millions in education from kindergarten to tertiary levels yet we still have some way to go to solve the skill mismatch in particular sectors.  Indeed, we progressed to attract FDI particularly investors in manufacturing and one acknowledges the advantages of a paradigm shift in Malta Enterprise’s policy to provide custom built factories.  

Previously manufacturing suffered as a potential investment choice since investors had to wait months due to the lack of ready-to-use factories.  The recent building of custom-made factories for the extension of PlayMobil, Lufthansa Technik and Crane Currency speaks volumes on this aspect.  It goes without saying combined with the use of robots and specialised machinery, it is a fact, factories are becoming smaller in size yet becoming more capital intensive.  

It is encouraging to read that government has appointed a post-Covid Renaissance ministry to help plan a revival in niche markets as a compliment to the fledging financial services - currently under siege from Brussels.  Be that as it may, there is a more realistic view about an economic revival when one speaks to the associations of SME’s and start-ups which is different from the placating predictions of Central Bank reports.  

As a hard-hit segment included those unsupported businesses marked as non-essential suppliers which suffered from the severe drop in domestic trade.  These have had a “devastating” year and struggled to keep their business afloat, with one business owner saying he was making just enough not to close shop.  Some invested in temporary solutions to set up websites for online deliveries.  

For example, organizations which provide event planning services (eg weddings, social activities etc) which have no business booked are eagerly looking forward to June 1 as the day when work can resume. 

To conclude there are a number of indicators that the economy can only flourish once the fundamentals are in place and herd immunity is achieved by the end of the year.  We can never underestimate the importance of maintaining social equality since wealth distribution during the past year has taken a turn for the worst.  

Quoting from a recent Europe-wide study that shows Malta demonstrated “a clear trend of increasing wealth inequality” over the last seven years.  This “L-Aqwa Zmien”, was characterised by accelerated economic growth and a property boom that was spearheaded by the Muscat administration.  Let us pray that the magical effect of the pent-up demand post 1st June can act as an antidote to recover opportunities lost during the pandemic. 

 

George M. Mangion is a partner in PKFMALTA - an audit and business advisory firm. 

 

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