The outlook

The reported bounce in Eastertime business provided another sign that the economy is shedding the after-effects of September 11. A GRTU survey indicated a positive outlook for the next three months, with 76 per cent of respondents reporting a better-than-expected level of activity in the Easter period.

The evidence goes beyond a survey of business sentiment and the anecdotal. The just-released unemployment figures for March show a 12-month drop of 161 persons on the combined part one and part two jobless registers. The unemployed numbered 7,564, compared with 7,725 in March of 2002. The decline was mainly in short-term unemployment.

A more detailed picture of the job situation becomes available with a longer lag. Actually, the most recent comprehensive ETC data is for December 2002. One revelation is that at year's end, private sector employment had risen by 439 from December 2001.

It is useful to compare each particular month with the same month of last year. A string of such comparisons allows you to spot possible turning points. In fact, the NSO release containing the latest ETC data makes it easy to make such month-to same-month comparisons for September 2002 and after.

Back in September 2002, private sector employment was 312 less than in the previous September. Through most of 2002, employment continued to be buffeted not just by lacklustre foreign demand for both tourist and manufacturing exports, but also by the ongoing process of restructuring and liberalisation at home. The uncertainty that clouds all pre-election periods was especially acute this time, because there was so much at stake for the direction of the economy, and the country.

Employment news in the last quarter of 2002 was generally positive. The drop from the previous year in private sector employment narrowed to merely three persons by November, while December's employment - as I have just mentioned - was 439 up on the previous December.

Employment growth was strongest in private market services. In private direct production, employment growth in construction and agriculture partly offset job losses in manufacturing. As I mention below, export performance improved in the latter part of the year, providing grounds for optimism in the outlook for the manufacturing sector.

Meanwhile, public sector employment was down 926 in December from a year earlier. The prime contributor was the successful retirement scheme at the dockyards.

Clear signal

The referendum and election results sent an unequivocal signal about voters' confidence in the government's strategy. Such affirmation provides a boost that will far surpass the kick-start that would have come from Labour's two-month tax holiday stunt, even under the most optimistic scenarios. Now business and industry know the direction of economic policy. We know that the trade protection will be gone for good. It was long peddled as a safeguard for jobs, but in fact it served only to discourage investment and stifle growth.

Until Maltese voters reaffirmed their mandate on EU membership, home-oriented industry found reason to procrastinate on the investment needed for better-quality products. As long as there was the threat of an end to, or a reversal of, the path towards liberalisation, with consumers remaining deprived of choice in their purchases, the necessary investments could be delayed. With the signing in Athens of the accession treaty, delay is less likely.

Beyond the immediate impact of membership there are the longer-term implications for Malta's place in the world-wide race for improved economic well being. There is evidence showing that the gap in economic welfare between the developed and the developing world has been widening instead of narrowing, leaving the third world further behind in relative terms.

In the recent past, Malta has been one of the exceptions. We have narrowed the gulf separating our living standards from those in the richer economies. But the pace of our convergence has been too slow. At recent rates of economic growth, convergence would not happen for several generations into the future.

With EU membership, Malta has taken the step that will speed up convergence. We now join an economic union of advanced countries. We are in the process of taking on their policies, standards and rules. By participating in EU programmes, we will share in the benefits available to the member states.

What stagflation?

Consider the weak state of demand abroad for our two primary exporters, manufacturing and tourism. Moreover, substantial restructuring has been proceeding at home, along with - until just recently - an air of uncertainty concerning Malta's long-term strategy. Considering all this, the economy showed considerable resilience. Corrected for inflation, the gross domestic product grew at a clip of one per cent in 2002. Even if this was below the growth rate in a number of other countries, the difference can be explained by Malta's additional challenges.

The performance of various components in the second half of the year were particularly encouraging. Take exports, a major contributor to the GDP. In nominal terms, exports declined by 6.9 per cent in the first half of the year, but then rose by 7.5 per cent in the second half. Corrected for price changes, the contrast between the two halves was even sharper. Exports declined by 11.6 per cent in the first half, but increased by 2.1 per cent in the second half.

Manufacturing performance depends critically on export markets. Uncorrected for inflation, manufacturing output - the sector's contribution to the GDP - fell by 4.5 per cent in the first half, but rose by 10.1 per cent in the second half.

It was not that long ago that the Cassandras on the other side were bemoaning the 'stagflation' problem, but these allegations were doubly unfounded. It is bad enough to allege stagnation at a time of fundamental and overdue restructuring. Equally missing is the inflation part of a stagflation problem.

On the prices front, inflation remains very low. The official inflation rate is measured on a 12-month moving average basis, where events of previous months have a longer continued effect on the current statistic. By that measure, inflation has declined for the 11th month in a row, hitting 1.46 per cent in March 2003, the most recent month available, compared to 2.3 per cent in the EU.

The more current way of measuring inflation compares prices in a particular month with those a year earlier. By that measure, March prices were 0.5 per cent higher than in March 2002. This is a very low level of inflation, even if it was up slightly from the negative rates reported in the preceding months. Contributors were seasonal food prices, as well as budget related increases in the "beverages and tobacco" category. There were small declines in "household equipment and house maintenance costs" as well as in prices of "transport and communication".

On the other hand, "clothing and footwear" registered a remarkable drop of 10.5 per cent in the twelve months ending in March. We should not ignore the positive effects of liberalised markets on reduced costs and lowered prices.

The outlook on the economic front is indeed positive, with the end of the war in Iraq bringing moderation once more in the oil market and a resumption in better tourist flows as the threat of terrorism subsides. On the home front, despite the coincidence of two withdrawn resignations at the helm of the MLP and the GWU, indicating that the old guard is managing to dig their heels in, the election and referendum results have given certainty to the future direction of Malta, a future within the wider safety net provided by a community of nations. This factor will strengthen our economy and provide many opportunities to increase and develop both existing and new activities.