Reading through the business media, one notes interesting trends about Malta's GDP growth.
This is expected to slow down, dipping from 6.9% in 2022 to 4% this year and 3.7% in 2025. Some may consider this a good sign that an overheated economy is heading for a slowdown but not a hard landing.
Certainly, a lot depends how slow is the expected drop in inflation. The National Statistics Office said the highest annual inflation rates in July were recorded in food and non-alcoholic beverages (10%), and housing, water, electricity, gas and other fuels (7.6%).
This means that core inflation will remain high. Will this have a deteriorating effect on employment and cost of living? How accurate are we measuring growth in an effort to discover whether our economy is sustainable or not? The popular and trusted measure is the GDP factor. As the GDP increases, so does the percentage of deficit decrease proportionately and may reach the hallowed 3% level. The darling sector which attracts adulation is the building and construction sector.
This is blessed with a Midas touch particularly when state-owned seafront plots are sold at fire-sale prices to business moguls. Mostly erect high-rise towers and luxury hotels. The common feeling is that all luxury apartments and suites are sold ahead on plan so developers are not worried about cash flows. All this makes you wonder how much cash was stashed under the mattress and is seeking refuge in speculating.
A common trick is to place a deposit on three apartments on a promise of sale agreement. One you keep, the rest sells at a profit. At a piecemeal level, this will yield handsome profits (after tax) to a number of speculators which keeps the sector buoyant. The fly in the ointment is that the Finance minister, Clyde Caruana, was quoted as saying that building and construction make a much smaller contribution to GDP, and yet the country persists with a Planning Authority that simply continues to churn out building and construction permits like pastizzi.
For instance, GDP doesn't tell us much about the polluting, and the non-polluting, sectors of the economy, and which are our national depleting and conserving activities. Energy audits are still not published and there is little enthusiasm for the strict ESG rules (the ESG alliance is now chaired by a politically-appointed architect, who is busy heading BCA, OHSA, MCESD and others).
Regrettably, real headaches come later, not forgetting sector sustainability, an energy consumption intensity, retention of ODZ space in its naturally unbuilt state, power-cuts, carbon dioxide emissions from fossil fuel use, the fast rate of increase in population, these and others are all omens telling us to change course and act contrite. Combined with a lacklustre education system: one that magnanimously pays everyone starting from kinder to university grade: providing stipends, free transport and education (yet 40% fail "O" levels).
Seriously, at a time when the island's only resource is manpower yet the upgrading and digitalisation of the cohorts is hampered due to an overall flawed education system, the repercussions of which have also seeped through the business sector which is facing a shortage of skills. Cutting through the veneer of high-sounding titles of organisations propagated during this decade, one meets a National Skills Strategy, a National Employment Policy, a National Skills Council and now there is talk of setting up a National Education Strategy and Policy.
Moving on, a recent KPMG report finds that Malta's foreign workforce has changed dramatically over the past few years, now growing to a total of nearly 97,000 workers, just over a third of Malta's entire workforce. The slowdown in the construction sector has entered its second year, shrinking by 14% in the first three months of 2023, compared to the same period last year. This trend has now persisted for a year-and-a-half.
KPMG notes that this is the sixth consecutive quarter that shrinkage in the sector's gross value added has been recorded compared to the same period a year earlier. How do we solve the acute shortage of workers? The answer is a tangible high influx of TCNs now physically evident when one shops, visits restaurants, takes a bus ride, orders a cab and books a meal delivery at home. There is nothing wrong with having non-EU nationals who drive our cabs, public buses and sweep streets.
The problem is mostly about drivers of "Y" plates who do not have a local or EU standard driving license and have difficulty to manoeuvre the narrow Malta roads unless they use GPS. Some may ask, is this a new phenomenon of recent demographics that one in five residents is a foreigner? Certainly, they work very hard and most can be classed as cheap labour (apart from nurses and doctors) which in the end gradually lowers our cost of living. The stark reality is that most immigrants are unskilled and have large families to support back home.
In a typical case, we have seen a proliferation of hail-hire cabs driven by TCNs. Safety on our roads is a top priority for Transport Malta and it has recently refused permits to drivers without a Malta or EU license. In a tiny island, the number of cabs shot up by almost half in a year, from 2,700 to 3,900 with another 3,000 applications waiting in the queue at recruiting agencies.
A 35-year-old Indian national (a father of four, who provides for his parents, his grandmother and a widowed aunt in India) is the first one of an estimated 3,000 people who was refused a job as a driver under the new TM rules.
On the subject of migrant jobs, America is also feeling the pinch of more vacancies than workers. In fact, recently it allowed about one million migrant workers in an attempt to cool down the over-stretched labour market. The US unemployment rate sits at just 3.6%, a touch above a five-decade low.
One may argue that everything else being equal, a low unemployment rate is associated with a rising inflation rate, a relationship known as the Phillips curve. In the decade before the pandemic, the Phillips curve had come into question, because inflation remained quiescent even though the jobless rate plunged.
What is needed to help bring inflation to heel is a period of subdued growth, which would lower the economic temperature. Similar to Malta's job market, quoting Jobsplus, this has remained amazingly resilient - the question is, will this herald a slowdown beyond 2024/5?
gmm@pkfmalta.com
George M. Mangion is a senior partner within PKF Malta