Editorial | Rising prices a warning on wages

BusinessEuruope’s Economic Outlook for Autumn 2021 is a clear warning on mounting price pressures – fact of life not just for major European companies but also for Maltese SMEs.

The EU economy is undergoing a strong recovery which gives ground for optimism for Europe’s businesses after a long period of almost unparalleled hardship. But Europe’s exports and production are increasingly suppressed by growing strains and bottlenecks in global supply chains.

Energy prices have also surged, factors which push up input prices for companies and cause production to come to a halt due to lack of necessary materials. This threatens to blunt the upturn.

There is a clear risk that even short-term price rises could translate into longer-term inflationary pressures. Adding to the wage pressures, bottlenecks have also appeared in the labour market, with the proportion of firms experiencing hiring difficulties back at pre-pandemic levels.

Nowhere is this best illustrated in Malta, which is completely at the mercy of the global supply chain, and is suffering an exodus of foreign workers which allowed a sustained growth for private businesses that needed a plethora of skills at reasonable prices. Today, many businesses are not functioning at their pre-pandemic levels because of the absence of a large volume of workers previously residing in Malta.

The silver lining is the State aid that has supported businesses and the continued good fortune of low energy costs in Malta. Yet businesses are facing the pressure of inflationary wages, and this means that moderation is crucial in ensuring that temporary price rises do not lead to a damaging wage-price spiral, which would risk damaging competitiveness and in turn, cause higher inflation.

The strong economic recovery gives cause for optimism, but it remains essential that a premature tightening of supportive fiscal policy and related measures is avoided in the short run. Direct payments to vulnerable households, deferred payments, tax cuts, and state aid for companies that are compatible with the EU state aid rules, remain crucial.

Prolonging existing measures under the State aid Temporary Framework is key for European companies at this stage of the pandemic, and it is important that Europe does not resume to the normal rules on State aid prematurely before the recovery is self-sustaining. On the other hand, state aid policy should support good aid and investment in research and innovation projects that contribute to the EU’s edge on a global stage. European businesses should be supported in their transition towards climate neutrality and sustainable growth so in principle, eligibility to aid should be granted to all technologies that contribute to climate transition.

The current shortages in raw materials, the subsequent increased prices of materials and the peaks in transportation costs and obstacles to mobility of personnel, are also a factor affecting Maltese businesses, which in turn must increase strategic safety stocks. However, certain areas require public action, such as the elimination of all export restrictions, promoting regulatory cooperation and the adoption of international standards, as well as carefully designing initiatives in the area of sustainability. Several measures can be useful to alleviate pressure, such as simplifying customs procedures, ensuring better coordination on health and safety measures as well as travel restrictions, and monitoring and addressing the uptake of trade-restrictive measures by governments.

Perhaps it is also time that governments promote “buy national” policies, so as to ensure continued support of national industries that seek to fill in the gap of the global supply chain disruption.