What government might really think

Last February 6, Labour MP Evarist Bartolo tabled a parliamentary question asking the Prime Minister whether the Maltese government had presented its updated Convergence Plan 2005-2008 to the European Union and invited him to table a copy. One week later, Lawrence Gonzi confirmed that the document had been produced and presented to Brussels for review. He tabled a copy of the document which is now public domain.

It is unusual for this government to stay mum and not publicise any such high-profile report. Nevertheless, when one reads it, one might well understand why. The comparisons with the November 2004 update of the Convergence Programme, made in the document itself, shows that the government is generally off target.

The language used in the report is crude and straightforward. Far from the populist and triumphal public statements, this might give us a closer insight into what the government might really think about the state of the economy.

I do have my reservations on some of the causes identified by the author as the main culprits of our economic downturn. International oil prices and the situation in the electronics sector do have an impact. Nevertheless, the government's economic and fiscal policies have to be addressed in such an analysis. But one might be asking too much of the government to expect it to criticise its own policies!

Furthermore, there are some mismatches in a number of other issues, including the expenditure on the new hospital, and a decrease in unemployment in a period during which economic growth is revised downwards.

I quote verbatim:

"The growth performance of the Maltese economy forecast in November 2004 is not expected to materialise as a result of a slower recovery in the main trading partners' economies, particularly low demand for Maltese exports in the electronics sub-sector, and slower growth in private consumption expenditure. Indeed, growth forecasts for 2005 have been revised downwards from 1.5 per cent projected last year to the current 0.9 per cent projected this year. Net foreign demand is expected to contribute negatively to economic growth by 2.7 percentage points, compared to a negative 1.6 percentage points projected in the November 2004 update of Convergence Programme. This is expected to be partly compensated by domestic demand which is expected to contribute 2.1 percentage points to GDP growth in 2005, unchanged from previous forecasts. It is pertinent to note that the projections contained in this Programme reflect the latest revisions by the National Statistics Office (NSO), including revised data for 2004, as well as preliminary estimates for the third quarter of 2005.

"Medium-term growth prospects have also been revised downwards in this Programme. Growth prospects for 2006 have been revised downwards by 0.7 percentage points, with foreign demand remaining the main contributor to this decline. Meanwhile economic growth in 2007 is expected to reach 1.2 per cent, compared to 2.2 per cent projected in November 2004. The revision relates to lower domestic demand while the performance of the external sector is expected to improve marginally.

"Growth forecasts for 2005 were significantly influenced by the performance of the electronics sub-sector. A drop of 4.3 per cent in exports of goods and services is expected in 2005, compared to a growth of 2.0 per cent projected in November 2004. This reflects recent data published by the NSO as well as lower GDP growth forecasts in Malta's main trading partners. Meanwhile, imports of goods and services, previously projected to rise by 3.5 per cent in 2005 are now projected to decline by 3.2 per cent. This primarily reflects lower imports of industrial supplies, in line with lower export prospects. In 2006 and 2007, both imports and exports of goods and services are expected to recover. However, growth rates have been revised downwards compared with the forecasts presented last year. These forecasts primarily reflect lower than expected foreign demand as a result of lower GDP growth forecasts in Malta's main trading partners. Furthermore, although a moderate recovery is expected in the international semiconductor market, the growth rates are considerably lower than those projected in November 2004. Thus, the scenario now reflects a more modest pick-up in external trade.

"Although the contribution of domestic demand is expected to remain unchanged in 2005 and 2006, its composition is expected to change substantially. In particular, whereas private consumption expenditure was projected to grow by 1.0 per cent in 2005 and 1.4 per cent in 2006, these forecasts have now been revised downwards to a negative growth of 0.9 per cent and 0.2 per cent in the corresponding years. This revision takes into account the available data for private consumption expenditure for the first nine months of 2005 as well as the impact of the recently announced measures which aim to mitigate the significant increase in the international price of oil. In addition, growth in government consumption has also been revised downwards, reflecting trends in the latest data available.

"On the other hand, growth projections for gross fixed capital formation for 2005 and 2006 have been significantly revised upwards to reflect capital expenditure projections by the public sector. This primarily relates to the expenditure by the government on the new hospital which is expected to be completed by 2007. As a result, investment expenditure is expected to increase by 11.3 per cent in 2005 compared to a growth of 7.8 per cent projected in November 2004. Forecasts for 2006 have also been revised upwards from a negative 1.6 per cent to a positive growth of 3.3 per cent.

"GDP growth in 2007 has been revised downwards from 2.2 per cent projected in November 2004 to 1.2 per cent projected in this Programme. In 2007, a recovery in private consumption expenditure is expected, although growth forecasts at 0.6 per cent are still 1.0 percentage point lower than projected last year. A marginal growth in the government's final consumption expenditure is now expected in 2007. On the other hand, investment expenditure has been revised downwards by 4.2 percentage points to a negative growth of 3.8 percent, reflecting the completion of the new hospital. As a result of these developments, the contribution of final domestic demand to GDP growth is expected to turn negative, compared to a positive contribution projected in the November 2004 update. Meanwhile, while lower growth is projected in exports of goods and services in 2007, the growth in imports of goods and services has also been revised downwards, but by a larger magnitude. As a result, the net contribution of the external sector to GDP growth is expected to rise.

"Despite a lower projected economic growth performance, forecast inflation has been edged upwards to reflect supply-side shocks. In particular, inflation in 2005 is expected to be 2.8 per cent compared to 2.4 per cent projected last year. This primarily relates to the effects of the increase in the international price of oil. The inflation projects for 2006 have also been revised upwards by 1.2 percentage points to 3.1 per cent mainly reflecting the increase in the fuel surcharge on water and electricity consumption announced in October 2005. Subsequently, the inflation rate is expected to decline to 2.5 per cent in 2007, which however remains 0.6 percentage points higher than that projected in the November 2004 Programme.

"Unemployment is expected to be lower than its level projected in November 2004. This is in line with recent unemployment figures which show a decline in the first nine months of 2005. For 2006 and 2007, the unemployment rate is expected to fall, in line with the trend in November 2004 forecasts."

One might disagree on the causes and results, but the writing is on the wall, or rather in the government's own report.

Mr Muscat is a Labour member of the European Parliament.

www.josephmuscat.com