The year that was

It is customary that at the end of the year one makes an assessment of what has been and possibly of what should have or should not have been. Therefore, as we approach the year end, one can also seek to assess how our economy has fared during 2006, starting with the premise that we could always have done better. In consequence the argument becomes one as to whether the glass is half full or half empty, as we could always have filled the glass a little bit more.

There is another premise that I would like to make - the performance of any economy is the result of individual decisions that we take throughout the year; some small some not so small, some in Malta while some are taken well beyond our shores.

The monetary policy adopted by the Central Bank of Malta and the fiscal policy adopted by the government are critical for the performance of the economy, but in the long run the economy will only grow if individual businesses (both foreign and local) invest enough money to sustain current economic activity or to generate new activity and if individuals have the demand for goods and services produced in Malta and are willing to spend money to satisfy that demand. As such, the statistics will tell us a story which is factual and current, but will not tell us how the storyline will develop in future. Only investors and consumers can tell us that.

The factual and current story shows that the gross domestic product increased by 2.7 per cent in real terms in the first nine months of this year when compared to the same period last year. The expectation for the full year is that we will end up with a growth rate that is close to this level. Gross value added also increased, even if the increase was subdued because of the increase in the price of fuel. It is interesting to note that both the services sector and the manufacturing sector contributed to this growth in value added.

The balance of payments show a deterioration in the first nine months of this year, evidently the result of the increase in fuel prices. If one were to eliminate the impact of the fuel bill, the balance in the current account would have widened by only a small amount.

Two elements need to be considered. The first is the downward pressure in the prices of the goods and services exported by Malta. This implies that more has been exported for less money and so, in real terms, exports have increased by more than the nominal figures suggest. The second is that the deficit in the goods and services account is reduced significantly by an improved performance in the income account and in the capital transfers account.

Industrial performance as evidenced by a set of indicators published by the National statistics Office show positive trends. Turnover increased by over 23 per cent on a year on year basis and employment increased marginally by 0.5 per cent. A question that needs to be asked is why the growth in turnover does not reflect so strongly in employment.

I believe that the drive to make efficiency gains is reaping its benefits and in turn this strengthens the position in the market of companies operating in Malta. Moreover, one needs to remember that during the past year, we have had a number of important players in industry that have announced further investment in their Maltese plants. This certainly implies a more solid foundation for the future.

One dark cloud remains the tourism sector. Throughout the year we have had a drop in the number of tourists visiting Malta, the number of bed nights is also down, as is expenditure by tourists. However, a number of initiatives have been set into motion that should ensure a rebound in 2007.

Inflation is back to manageable levels. We experienced an increase in the rate of inflation for most of 2006. This was sounding alarming bells not only because of the criteria that Malta has to meet to adopt the euro, but also because it was weakening the competitive advantage of firms operating here. However, the data for November 2006 shows that inflation is back on its way down. The expectation is that the rate of inflation will remain at the levels achieved last month.

Employment, always a key economic indicator, is showing excellent results. The labour force as a percentage of the population of working age is increasing. The activity rate, that is the number of persons in employment as a percentage of the population of working age, is also increasing. Unemployment is down. The total number of persons in employment has increased by over 3,000 on a year on year basis. There has been an increase in both full time employment and in part-time employment. The way the labour market is functioning is also continuing to change, with an increase in flexibility.

Overall 2006 has been a good year for the economy. It has provided growth and we kept on with our convergence programme to adopt the euro on January 1, 2008. The level of investment has remained healthy and new economic activities have been created, while others have been sustained. It should provide a good basis for further growth in 2007 and beyond, but that is another issue which needs to be tackled when discussing the challenges that our economy has for the coming year.