18/03/2021

The economic impact of lockdowns - Prof. Edward Scicluna

An article by Prof. Edward Scicluna, Governor of the Central Bank of Malta, as published in the Times of Malta on 14 March 2021.

The main economic burdens brought about by the COVID-19 pandemic are essentially twofold. The first is the extraordinary pressure on health resources and health-related expen­ditures: starting with the public information campaign, testing, contact tracing, emergency additional healthcare and extra hospitalisation spend, and more recently, vaccination.

I recall the Finance Ministry put aside a provisional estimate of €20 million, which grew over the year to nearly €100 million, if we were to take additional indirect costs into consideration.

The second and far bigger economic blow which the world had never experienced before is the ceasing of economic activity and commerce in particular sectors, mainly international air travel, accommodation and related sectors necessitated by the scientific advice that lockdowns are at certain points unavoidable.

One year of experience has taught us how to be more selective in the timing periods, locations and types of lockdowns and closures to minimise the economic impact of the needed containment measures. On the downside, an increasing level of fatigue is leading to a deterioration to the quality of these containment measures.

What governments are doing with taxpayers’ money is the mitigation of the economic burdens on households and businesses. No matter how generous and expensive the various schemes are they can never bring back the permanent loss of incomes arising from the closure of business activity. Take tourism to our island as an example. The €2.2 billion annual spend in 2019 has been lost for good in 2020. This is the real economic impact of the pandemic. And the same applies for other affected sectors.

The government income support schemes are there to lessen the pain of the affected families and businesses. But these go beyond an equitable distribution of the economic pain. They make economic sense for the whole population. We just cannot afford to let businesses go to the dogs, with mass layoffs, a deluge of bankruptcies, and stresses on our banks with a high level of non-performing loans, when all indications are that the crisis is temporary.

One year, maybe two, but temporary. We want as many firms as possible to survive and hit the ground running when normality ensues. What is important to note is that these measures do not add to the negative economic costs that the country has been hit with. But it spreads these costs wider than the affected sector and also shifts parts of them to future years.

While the most talked about partial lockdowns are those that affect our civil liberties, like those of association, schooling, recreation, and day-to-day normalities, though significant, they do not contribute to the biggest economic impacts. Our biggest lockdown is the airport and all the activity affected by it. Our economy depends in a large way on this sector. The future of travel and the degree of normalisation in this sector is key to examining the long-term impacts on our economy.

Real GDP growth fell by seven per cent in 2020, with the decline driven by the services sector. This reflects the fact that the COVID-19 containment measures mostly hit the sector comprising wholesale and retail trade, transportation, and accommodation and food service activities. The sector was impacted strongly by travel disruptions during the year, the temporary shut-down of non-essential services and other COVID-19 related containment measures.

The activity of firms involved in professional, technical and scientific activities as well as the real estate sector also contracted compared with a year earlier, but to a much lesser extent. Meanwhile, activity in the manufacturing sector was broadly unchanged from 2019, while digital sectors such as remote gaming and information and communication grew significantly.

The wage supplement ensured that the labour force participation rate remained buoyant and kept unemployment rates from spiking up. Instead, we have under-employment and a large degree of under-utilisation of the economy’s productive capacity due to the containment measures. The reduction in working hours coupled with a deceleration of foreign workers have helped reduce the expected large falls in productivity.

As for the costing of each lockdown, all we need is to look back and trace the cost to the economy with the degree of the containment measures in place at that time. This work is being carried by the Central Bank’s research department in conjunction with the Oxford COVID-19 Global Government Response Tracker initiative, and will soon be published as a working paper.

Not surprisingly, our economy took the biggest knock in the second quarter of last year when the economy dipped by 14.6 per cent. The stringency measures then were at their most severe with an index of 75, though falling short of 100 associated with a complete national lockdown experienced in some other countries. In the second quarter of 2020 the stringency index fell by half to 38 and the economy lost 8.8 per cent of its value-added year-on-year. Surprisingly, while the stringency index rose to 51 in the last quarter, the economy fell by 6.2 per cent, which is less than the third quarter. This indicates that businesses were learning how to deal with the containment measures in a more efficient manner.

The future remains uncertain, with the ECB talking of cautious optimism. In the meantime, the policy advice for both monetary and fiscal policy is not to step on the brakes as yet. For sure it looks like it will continue to remain a rough ride towards the light in sight at the end of the tunnel.

Thankfully, countries like Malta had already a reserve in store for such eventualities, providing a degree of manoeuvrability. It is important that when the economy allows it, this policy towards lower indebtedness continues.

Gradually, future payments must make good for the balance of the current costs of the pandemic. But that can only be accomplished painlessly if the economy grows at satisfactory rates. The EU is keen to see us do that while becoming more digital and greener. That is now our challenge ahead. I am positive that it can be done.

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