Central Bank estimates growth of between 2.8-3.4 per cent

The Central Bank expects the economy to grow by between 2.8 and 3.4 per cent this year, compared to 2.9 per cent recorded last year.

The bank says in its annual report, tabled in Parliament yesterday, that while economic growth last year was largely driven by a rebound in exports, this year stronger private consumption and gross fixed capital formation are expected to be the main factors. Export growth is expected to be stronger but this may be offset to some extent by an acceleration in import growth.

The bank said the projected strengthening of domestic private consumption stemmed from the easing of the tax burden announced in the Budget.

A pick-up in real wage growth due to lower inflation, coupled with higher employment growth, was also expected to have a positive impact on household disposable income this year.

"Higher spending may also result as a spill-over effect of cash de-hoarding by the public in anticipation of the euro changeover."

On the negative side, higher interest rates may have a dampening impact on borrowing, and thus consumption, while encouraging savings.

In his introduction to the report, Central Bank Governor Michael C. Bonello reiterates his calls for the removal of structural impediments to faster growth.

"An early removal of barriers to greater efficiency, particularly the remaining rigidities in the product and labour markets, would contribute to an acceleration of the convergence process towards EU income levels."

He observed that in the four years to 2005, unit labour costs grew by an annual average of 2.4 per cent faster than the 1.5 per cent reported in the euro area. In the same four years, productivity trends were erratic and resulted in an annual average increase of only 0.1 per cent. (Later in the report, the Central Bank says unit labour costs dropped by 0.5 per cent last year, reflecting a slightly faster rate of growth in productivity than in employee compensation. While productivity growth was up by 2.0 per cent, nominal compensation per employee grew by only 1.5 per cent last year).

Underlining the need for faster productivity growth, Mr Bonello said Malta had made slow progress in some of the key objectives of the Lisbon Agenda, including the number of persons who completed an upper secondary education or higher. Since the proportion of the GDP allocated to education was similar to the euro area average, the disparity in performance needed to be addressed through an improvement in the quality of education and the provision of more life-long learning and training.

There was also a need to create a more investment-friendly business environment, including through better regulation and a reduction in bureaucratic procedures and costs.

Mr Bonello also called for a rationalisation of recurrent budgetary expenditures. "Ways must be found, including a wider application of means testing, to shift resources away from the health and social welfare systems. The latter alone already absorbs one-sixth of GDP," he observed.

The Central Bank last year posted a profit of Lm11.2 million, compared to Lm10.8 milion in 2005.