The Malta Independent on Sunday
CORONAVIRUS
‘Lockdown would bring economy to its knees, but contagion would be worse’
A total lockdown would bring certain economic sectors, such as tourism, to their knees, but contagion would ultimately leave “devastating effects” on all sectors of the economy and leave tourism in a far worse state than under a lockdown, economist Philip von Brockdorff told The Malta Independent on Sunday.
As the number of COVID-19 cases increases in Malta and across Europe, The Malta Independent on Sunday asked two economists – Philip von Brockdorff and Gordon Cordina – for their views on the economic effect that the pandemic will have, both on a Maltese level and on a global level, and how Malta can look to recover once the situation passes.
With calls for a total lockdown of the country increasing by the day, this newsroom asked what the long-term economic effect such a course of action would be on Malta.
“If the lockdown were to be decided based on medical advice, then that would take precedence over all short-term economic interests. In my view, ignoring expert medical advice would cause greater damage to the economy than not implementing a lockdown,” von Brockdorff told this newsroom.
“Whereas a lockdown will bring sectors like tourism to their knees for a period of time, a contagion will have devastating effect on all sectors of the economy, leaving tourism in far worse state than under a lockdown,” he said.
“If you look at the evidence in China, the lockdown of entire cities far larger than the size of Malta obviously hurt economic life during the lockdown, but it was necessary to contain the spread of the virus. We have to apply the same policy, despite the short-term adverse effects. If the lockdown achieves its aim, then the medium and longterm macroeconomic interests of our economy would have been safeguarded,” he continued.
“Admittedly, in a post-lockdown scenario, it will take a while for the economy to return to the rates of economic growth we have experienced recently. We may actually not return to the same levels but that may not be such a bad outcome after all,” he pointed out.
“Again, if we take the tourism sector, it is evident that the sector has grown beyond all expectations and beyond levels that can be sustained given the size of the Maltese Islands. I believe all stakeholders (government and social partners) can learn from the experience of this crisis by (a); developing medium to long-term strategies and setting realistic targets for economic sectors and (b); moving towards a sustainable growth path that focuses more on sectors that are less reliant on the flow of people to the Maltese Islands,” he concluded.
The measures already taken by the government will no doubt leave an economic effect on the island. Many industries have already reported feeling the financial brunt of the worldwide pandemic, with the tourism industry being especially hit.
This newsroom asked what the government should be looking to do in order to ensure that Malta recovers economically once the current situation passes.
“The measures being put into place at the moment by the government are remedial measures, intended to mitigate some if not all of the negative effects of this crisis, such as cash flow and loan repayment problems. However, beyond the ‘now’, it would be opportune for the government to put into place a package of incentives, such as tax credits, to stimulate economic activity in line with what I suggested before, that is to steer the economy towards more sustainable growth levels,” von Brockdorff explained.
“As they say, every cloud has a silver lining, and in the aftermath of this crisis, I expect to see the government taking a more active role in setting economic direction with fiscal and other investment incentives going towards sectors that can achieve higher value added through enhanced productivity. A more effective dialogue with social partners would also help achieve this aim,” he continued.
“All this, especially the measures the government will apply in the next budget, would go a long way towards economic recovery but the economy may not necessarily look the same as it recovers and grows again. The downside is that environmental initiatives may become less of a priority unless they themselves promote economic growth,” he said.
On a more global level, Wednesday and Thursday saw the global stock markets plummet at rates similar to those which preceded the 2008 financial crisis. Many indexes fell some 20% in the space of a couple of days, and while there has been some recovery since, questions still remain as to whether the pandemic could ultimately bring about a global recession.
“A global recession the likes of which we have never seen is possible if there is contagion, but I don’t believe we will get there,” von Brockdorff noted.
“We will have a global slowdown, nevertheless, with economies including economies in the Euro area struggling to recover. In any case, Euro area economies were already slowing down before the crisis and the EU may need to revisit its Stability and Growth Pact to allow member states more fiscal space to boost public investment and hence stimulate growth,” he said.
“I believe that the crisis has already provided some important lessons for the Euro area and the EU in general. First, economies need an effective and more autonomous fiscal policy. Second, further investment in public health systems is an absolute priority,” he added.
“As for the rest of the world, I believe China could emerge stronger than before the crisis with its regime taking a firmer grip on economic governance. The US and other important economies, like Japan, will no doubt be impacted by plummeting stock markets, though part of this fall would appear to be market correction anyway.”
“A lot will depend on how quickly trade between nations can start to flow again. The present crisis has hit supply chains but these would be restored as soon as the crisis is averted. We may yet avoid a global recession, but as I argued before, this will depend on whether the coronavirus can be defeated within reasonable time,” he concluded.
Answering all three questions together, Cordina emphasised the need for support to sustain sectors which are more vulnerable to this pandemic.
“At this stage, the important thing is for a system of support to sustain the more vulnerable sectors and the other sectors which depend on them, involving measures by the government, banks and other stakeholders, including unions and employers,” he said.
“The economic shock will in all hope be temporary. It is therefore essential to minimise losses in jobs and business setups so as to enable a swift recovery in the medium term,” Cordina added.
The government has begun to reveal the economic assistance which it will be offering in this current situation. Prime Minister Robert Abela announced that taxes will be suspended for the months of March and April – provisional tax, VAT and social security contributions which businesses are due to pay to the government will be suspended to a later date which is still to be established.
He said that discussions will be continuing in the coming days and weeks for more measures in this regard, to make sure that the economy does not suffer to the point that people will end up losing their jobs.