Economic uncertainty in Malta highest after EU accession, Gonzi’s last years, 2019 protests and pandemic – report

Central Bank of Malta researchers have constructed an index measure economic policy uncertainty in Malta, helping them identify four key events that led to major economic uncertainty in the country.

Senior Economist Kurt Sant and Senior Economic Researcher Sarah Spiteri found that economic uncertainty spikes during general elections and other significant local or international events, remaining notably elevated during Malta’s accession to the EU, the 2011/12 political crisis in the last years of the Gonzi administration, the 2019 political crisis that led to the resignation of Prime Minister Joseph Muscat, and the COVID-19 pandemic.

Other spikes were experienced between 2007 and 2008, a time characterised by Malta’s process of adopting the euro, a general election, and the global financial crisis. The index rises again during the 2016 Brexit referendum and the US presidential election.

Moreover, between 2017 and 2019 the index shows a high level of economic policy uncertainty following the 2017 general election and culminating in the 2019 political turmoil.

Unsurprisingly, between 2020 and 2021, the index remained elevated for a prolonged period due to the COVID-19 pandemic.

After a brief period of stability during mid-to-late 2021, the index shows an increase in EPU in early 2022. This resurgence in economic and political uncertainty is likely driven by several factors, such as a resurgence in COVID-19, Russia’s full-scale invasion of Ukraine, and the 2022 general election.

To derive the results, Mr Sant and Ms Spiteri analysed newspaper reports on four national media outlets since 2004.

The new index, they say, can prove crucial for measuring economic performance, pointing to studies showing that economic uncertainty leads to a significant decline in capital investment and productivity, and may lead harmful effects on economic activity, including the labour market, investment, consumption, output growth, financing costs and asset prices, amongst others.

High uncertainty levels can also lead firms tend to delay investment and hiring, and induces spending cutbacks by households.

Since the EPU index is derived from news reports, its frequency can be adjusted to capture weekly levels of economic uncertainty, and can be used to forecast changes in household consumption.

The full working paper can be found here.