Joseph Muscat is back... with a post-COVID analysis for Labour ministers

Former prime minister Joseph Muscat’s 9-page economic note to Cabinet ministers predicts bad times for tourism and financial services, and a bounce-back for retail

You consulted me, now I consult you... Joseph Muscat with Malta prime minister Robert Abela
You consulted me, now I consult you... Joseph Muscat with Malta prime minister Robert Abela

Joseph Muscat is back. This time as an economic consultant brought back into the heart of the Labour government to map out a new way out of the COVID-19 pandemic. 

In a nine-page report compiled by “the office of Dr Joseph Muscat”, the former prime minister gave Cabinet ministers a note on the possible evolution of the Maltese economy in 2020 and 2021. 

In it, the former Labour leader, who resigned in the wake of the Caruana Galizia assassination investigation and its implication of his chief of staff Keith Schembri, gave a wide range of scenarios: as bad as a loss of 16.1% in gross value added in 2020, to as much as a bumper 10% growth in 2021. 

In all scenarios – ranging from mild to severe – Muscat laid out the inevitable: tourism will be badly hit due to global travel bans, but retail will likely to be the first sector to rebound. 

“These simulations anticipate a loss in gross value added of between 6.1% and 16.1% for 2020... the Maltese economy, as almost all economies globally, is expected to contract in 2020. Our estimates are between 2.1% and 12.5% depending on the scenarios. Nevertheless, this is generally a better performance than its economic peers,” Muscat said. 

But he anticipates the Maltese economy to go back in positive territory in 2021, “from as little as 0.2% to a bumper 10%.” 

In the ‘moderate’ scenario, a2021 recovery would be well below pre-COVID levels of expected GDP. In both the ‘relapse’ and ‘severe’ simulations, there would be no recovery from the losses of 2020. “In fact, further losses would be made,” Muscat warns. 

The ‘severe’ scenario projects a partial lockdown all throughout 2020 but returning again in 2021, with travel shut down until a vaccine is made available towards end-2021, and disruptions in global supply chain. 

Muscat’s analysis suggests it will be retail trade that will bounce back rapidly in all scenarios but the ‘severe’. 

“We anticipate that this sector will be able to recoup a large part of its losses in 2021, as it will quickly adapt to new health protocols that will be rolled out, and as international brands will seek not to outprice themselves from their global market share. 

“Telecommunications and information technology are also projected to be very quick to recover and return to their pre-COVID-19 expected trajectory.” 

But he spelt bad news for professional services such as legal, accounting, rental, leasing and consultancy , saying firms will cut down on this sort of spending after a downturn. 

“Financial services are also likely to be hit by second-round effects on account of non-performing loans, higher default rates and insurance claims, and lack of investment, even though European Union wide initiatives will help contain these effects. Manufacturing of non-essentials, such as clothing and electronics, could also feel such a second wave, though here the lost activity should be quite limited in absolute terms.” 

Muscat said that even under the most optimistic scenarios in 2021 and the pandemic defeated, the demand for travel will be lowered significantly.  

“In this respect, one expects resources to be further focused on niche tourism, such as culture, entertainment and event-driven tourism, where demand is less elastic and where value-added is higher,” Muscat said of tourism prospects. 

“At the same time, one can anticipate that the global trend towards accommodation-sharing, which had become a dominant part of the Maltese market, will slow down, diverting business to collective accommodation (hotels) with more openly verifiable health protocols. 

“This will also likely make more property available in certain segments of the long-let rental market, thus dampening rent prices which were considered to have an inflationary effect over the past years.”