What if the slowdown hits Malta? Two yellow jackets, two stories, one global economy

Men in bright yellow vests are synonymous with Malta’s construction boom that is at the heart of the country’s economic success.

Official statistics show that construction contributes around 4% in gross value added to the economy, an unimpressive figure. But economists like Philip Von Brockdorff believe the impact of the industry is grossly undervalued.

Last year, the Planning Authority approved permits for more than 12,000 dwellings, a two-decades-old record (see separate story on front page). This excludes permits for commercial establishments.

And with the Prime Minister saying that one of the problems facing companies that want to relocate to Malta is the lack of office space, it appears there still is a strong demand for new buildings.

The construction spree, rising incomes and a bigger resident population, contribute to domestic consumption, which is becoming a strong economic driver in its own right.

Malta is passing through an unparalleled run of strong economic growth that is way above the Eurozone average. In the third quarter of 2018, the economy grew by 7.5%.

But Brockdorff cautioned against a growing dependence on construction.

“We have become heavily dependent on construction and this has an impact on the sustainability of the economy… obviously, construction will remain an important industry but it is important to micro plan development and channel it in areas the country needs,” he said.

Malta will remain, for the foreseeable future, a place where men in yellow vests ply their trade in the myriad construction sites around the islands.

But yellow vests in France tell a different story altogether.

Yellow: the colour of inequality

The Yellow Vest movement, a loose coalition of anti-establishment campaigners, ordinary taxpayers and far-right activists, has taken France by storm. Born out of protests over a planned fuel tax hike, the movement has so far been resilient, hitting out at French President Emmanuel Macron for what is perceived to be his aloofness from the everyday problems of the ordinary French.

Brockdorff believes this movement is a manifestation of rising inequality that is a threat to stability.

The movement, which has no apparent leader, has said it will field candidates in May’s European Parliament election and polls have given it 10% support.

“The Yellow Vest movement is a manifestation of growing inequality and this is something that can rock the political establishment causing more uncertainty if left unaddressed,” Brockdorff said.

Inequality is one of the many risks looming on the horizon. On 21 January, the head of the International Monetary Fund, Christine Lagarde, said the organisation was once again cutting its global growth forecast for 2019 and 2020.

“After two years of strong expansion, the world economy is growing more slowly than expected and risks are rising,” Lagarde said, pointing at disruption to international markets caused by the trade standoff between the US and China.

US-China trade war

A survey of over 800 CEOs by research group The Conference Board, released earlier this month, showed that global business leaders saw recession as their number one external concern for 2019. Threats to global trade and political instability ranked second and third respectively.

Brockdorff said the US has a sizeable trade deficit with China that Donald Trump, with his ‘America first’ policy, wants to correct. “The situation remains very unpredictable and it all depends on how talks will end. No agreement will disrupt international trade and have a negative impact on economic growth.”

This, coupled with a possible correction in global stock markets, could cause widespread disruption.

Another factor breeding uncertainty is Brexit and the prospect of this happening with no deal. An abrupt departure will lead to a two-year adjustment that could be disruptive, Brockdorff added.

Malta will not be immune to a global economic slowdown. Depending on how severe and widespread it is, this could manifest itself in less investment, fewer tourists and general uncertainty.

So far, the economy is running above par and with government finances registering a surplus and the debt-to-GDP ratio heading below the 50% mark, Malta appears well-placed to face any impending storm.

Sounding the warning

But warnings have been sounded by social campaigners like Anthony Gatt, director of Caritas.

In an interview with the Times of Malta last November, Gatt called for better redistribution of wealth. “There are some who are doing well, however, people with a low income are suffering a lot… While there are a number of assistance measures in place, we believe that the well-off have to share with those who lack resources, so that no one would suffer,” he said.

The situation is nowhere near the boiling pot in France. Malta’s yellow vest ‘problem’ is a different kettle of fish altogether but government may have to do more to stymie inequality.