The Malta Independent 25 September 2022, Sunday
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'I cannot foresee a scenario where inflation will go back down to 1%' – MEA director general

Kevin Schembri Orland Sunday, 11 September 2022, 09:00 Last update: about 14 days ago

Director general of the Malta Employers’ Association (MEA) Joseph Farrugia cannot foresee a scenario where inflation will go back down to 1% in the foreseeable future.

In an interview with The Malta Independent on Sunday, Farrugia was asked for his predictions as to what prices will look like in a year’s time.

He doesn’t think that inflation is going away anytime soon. “Probably, in 2024, prices will still keep rising. Government, in a way, is doing its part by trying to subsidise energy bills. The extent to which it can keep subsidising energy is not known, but probably well into 2024. That is one of the reasons why in Malta we've had an inflation rate of less than 7%, when many other European countries had a much higher rate of inflation. So the subsidisation of energy is having that effect. Obviously I cannot see a scenario where inflation will go back down to 1%, in the foreseeable future at least.”

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The MEA this week published the results of a survey about the impact of inflation as well as the predicted Cost of Living Adjustment (COLA) on businesses, in which 330 respondents representing around 400 companies took part.

The survey found that for 55% of respondents, the COLA rise predicted for next year will result in a significant increase in costs and can affect the competitiveness of their business. Inflation in the past months has led to speculation that the COLA to be announced in the budget is to be between €8 and €10. Given the need for the COLA in order to make up for the effect of inflation on the purchasing power of employees, Farrugia was asked what could be done to minimise the impact on businesses.

“First of all, to clarify, we're not saying that inflation is the result of the COLA. The COLA is the manifestation of an agreement which has been in place for 30 years. There is an indexation between the wage increases and the rate of inflation. For a time, when inflation was very low, the COLA was practically negligible, at €0.58 or so. But now there has been a sudden spike and that is a shock to businesses. This emerged from the findings of our survey – not for all businesses, but especially for those that are labour intensive and operate in highly competitive markets and will therefore find it more difficult to pass on any increase in costs to the consumer."

"The COLA impact is not the same for all companies,” he said, mentioning that some companies have collective agreements that incorporate the cost of living.

“But it will definitely affect business projections and costs together with the other increased costs of raw materials and other items."

 

COLA proposal 'aims to create stability'

Earlier this week the MEA issued a proposal for an adjustment to the COLA mechanism, where it plans to minimise the impact on businesses year on year. The proposal is for a minimum and a maximum COLA amount which can be given out per year – from €2.50 to €6 a week – for a five-year period. And then on the sixth year, the balance will be paid out, where if it is owed to the employees it will be over and above the COLA for that year and if owed to the employers will be reduced from the COLA of that year.

Speaking about this proposal, Farrugia said the aim is not to reduce or increase the COLA. “We are not asking for a change in the mechanism. The mechanism has been contested by employers on the basis that we have wage increases that are indexed to inflation and not to productivity. But let's put aside that argument. The COLA has been in place and functioned for 30 years. We're not suggesting that we change the mechanism.”

He said that the MEA’s proposal aims to create more stability. “You can have years when inflation is close to zero, and we've seen this, and instead of a COLA of €0.58 or nothing, employees would receive a minimum of €2.50.” Then, he said, there are exceptional years like this one, where if the COLA is above €6, €6 will be paid that year. “But at the end of the five-year period, the amounts paid will be balanced out. If there is a balance in favour of the employee, then it goes to the employee and if there is a balance in favour of the employer, then it goes to the employer. But at least, one could say that for five years there is a maximum and minimum and that will work in everybody's interests because it will allow for better stability for businesses and therefore for their employees as well.”

He said that even the €6 being proposed as the high cap is exceptional. “The COLA hasn't been €6 for as far as I can remember,” he said.

Farrugia was asked how fair the proposal is, given that the COLA is given to employees for the purchasing power which they would have already lost this year.

He stressed that the MEA is not saying that there should be any adjustment for 2023, but rather that there should be a discussion among the social partners and any changes will be implemented in 2024.

“We are not contesting the €10 due in 2023. Secondly, it is not only a proposal for a maximum, but also for a minimum. If there is very low inflation and the COLA increase is €1, what we're saying is that €2.50 will be paid nonetheless. That's why it's a stabilisation mechanism. Looking back over, for example, the past 10 years, in the majority of years it would have favoured the employee, not the employer, as for many years the COLA was less than €2.50. But in such a case, we are saying that the employee would still receive a €2.50 minimum.” He said this would be compensated by having the €6 maximum and, at the end of the five years, everything would still be balanced out, "so it's not a question of employers paying more or employees getting less".

"We are suggesting that everyone gets the same amount over a five-year period, but it won't be subject to the current fluctuations."

In the past when the COLA was relatively low, many were silent about it and the only ones who were really speaking up were unions.

The MEA has always said “it's a mechanism that needs to be respected”, Farrugia said.

“We haven't had high inflation now for quite a number of years, I think in 2009 it went up to above €5.60, but our position then was still 'it is what it is, we have to pay it'. We never wanted to tamper with it. But at this point in time, when you have the COLA for one year being €0.58 then rising to €10 within a few years, I believe that is very dangerous for business and for the economy.”

50% of the survey respondents said they will partially pass on the increase in operating costs to customers/clients and 22% said they will pass on the full costs. Only 28% said they will absorb the costs themselves.

Turning to the high percentage of businesses that said they will pass on, at least partially, the increase in costs to customers, he was asked whether it is fair, given the amount of support taxpayers gave businesses throughout Covid.

“Let me correct that. The wage supplement went to the employees. It helped businesses of course, but the whole idea was to keep people in employment. In the absence of the wage supplement, many businesses would simply have announced redundancies.”

“In Malta, thankfully, we have a culture of job retention. Looking back to the financial crisis, Malta was not as adversely affected as many other industrialised countries, because many companies think twice before laying off people. That element kept people in employment.

Consequently, when Covid-19 started to subside, many companies already had the human resources necessary to start operating normally.”

He said that the pandemic’s impact wasn’t as bad as it could have been, had there not been the wage supplement.

“But the €800m spent on the wage supplement really was to subsidise employees’ wages and not the employers’. Employers of course benefited from it, there's no doubt that it favoured companies as well.”

 

Wage-price spiral

Asked about whether if costs keep rising and these companies just pass on the costs to customers it will result in a situation where inflation will continue to increase, he said: “This is what we are warning about, and this is why we felt the need to speak about trying to stabilise even the COLA. Because if we enter a situation, known as a wage-price spiral, it would be dangerous as it could push companies into losing their competitiveness. Companies in Malta in general will be less competitive compared to other countries abroad, and this is what we have to guard against.”

 A wage-price spiral is a concept where, because of inflation, employees might demand better wages and businesses will have to pass on that cost to consumers as the wage increases would outweigh gains in productivity and businesses would not be in a position to absorb such increases, which will create another round of rising prices.

He said that businesses facing rising costs generally have three options – absorb the costs, pass the costs on completely to the consumer or else partially pass the costs on to the consumers.

“There is another option, increase productivity to be able to absorb the costs and still remain profitable. But this is, especially in the short run, not always an option for many businesses. With respect to the passing on of costs to the customers, we tend to think only of the final consumer. For most businesses, their client is not the final consumer, their client is other businesses. So it is passing on the costs to other businesses, which in the end will filter down to the consumer.”

According to the MEA survey, many businesses said that the current inflation may affect their profitability, not that they're going to be making a loss (16% said they may face a loss-making situation).

He was asked whether businesses should take the current economic climate and work to stop the wage-price spiral he mentioned into consideration when saying that they want to pass on the cost to the consumers?

“There is no automatic cost-price adjustment for businesses, because it depends on the type of product or service that is produced. If you are operating in a very tight, highly competitive market, then obviously you cannot just raise prices, as you will be pushed out of the market. It also depends on the type of product.”

He said that consumers may opt not to purchase non-essential items also. “This is another point that emerged from the survey – businesses are concerned about the fall in demand. Quite a few replied that they expect aggregate demand to fall. In the domestic economy, it means that consumers will try to rationalise their spending – either switching to less expensive products or cutting off certain products which would be considered luxuries automatically.”

“Internationally, looking at our tourism industry for example, if British consumers face exorbitant energy bills they might have to take a decision – are they going to heat their homes less during winter and freeze or are they going to cut their holiday spending? Cutting holiday spending may mean not going abroad at all, going to cheaper destinations, opting for cheaper accommodation or even reducing the number of days they spend on holiday, which will of course affect both businesses and the Maltese workers as well.”

With regards to jobs in Malta, 64% of the respondents said that they're planning to keep the same levels of employees over the next 12 months and 28% said they are going to employ more people. Asked whether, looking ahead to 2024, he thinks this situation will change, and whether Malta will witness a downward trend with more employees being laid off, he doesn’t foresee a danger for Maltese employees.

“Currently, the major problem faced by many companies is not excess of labour, but rather a shortage, both in terms of numbers and in terms of skills, which is why our economy is becoming more heavily dependent on imported labour. But the message that emerges from the survey is that, while many companies are hesitant and worried about the future, on the other hand they do not intend to lay off employees. So probably the employment situation will not change much.”

He believes that the demand for foreign labour might subside a bit, “but I think Maltese employees are relatively safe, so to speak”.

 

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