Springtime and the dollar
For some time the US dollar has been in free spin against the euro and other currencies. As a result of the strengthening euro exchange rate, the Malta lira has also risen to record heights against the greenback. This upward trend seems to have passed...
For some time the US dollar has been in free spin against the euro and other currencies. As a result of the strengthening euro exchange rate, the Malta lira has also risen to record heights against the greenback. This upward trend seems to have passed largely unnoticed here in Malta, at least judging by the almost total absence of critical comment.
In operational and policy terms, it cannot have been similarly ignored. Certainly, the unit responsible to purchase fuel supplies would have been peering closely at the dollar movement and placing careful buy orders, on a both a spot and forward basis.
The international price of oil is set in US$. Despite the dollar's downward trend the price has remained fairly stable. That allowed for purchases to be covered at lower Lm rates. How that translated exactly into the final forward cost of both oil and the US$ would be the basis on which purchases are decided. A policy of careful buying on a moving average basis should be reflected in a falling or at least stable fuel surcharge in the months ahead.
That should help to rein in the domestic inflation rate. On Monday the NSO announced that the rate (measured by the 12-month moving rate, measured by the Harmonised Index of Consumer Prices) had dropped to 2.2 per cent in March, from 2.4 per cent in February. This confirmed that a gently sloping downward trend had developed since November.
Which was good news in the context of Malta's application to adopt the euro. That conclusion is not definite, as yet. Much will depend on the 12-month inflation rate registered this month and in May. The pointers are that Malta should remain below the average inflation rate of the best-performing three economies within the European Union.
The weaker dollar and its impact of underlying fuel prices should give a helping hand. That is one side of the dollar-euro exchange rate picture. Another side suggests less good cheer. Export companies which denominate their sales in US dollars are having a tough time. A weaker dollar rate relative to their base Lm costs, allowing for imports, pinches their profitability, unless higher productivity makes up for the marginal erosion.
Obviously, not all companies record the same shifts in productivity. The overall movement - as reminded by the governor of the Central Bank in that institution's annual return for 2006, tabled in the House of Representatives on Monday - has not been heartening. Unit labour costs dropped by a half of one per cent last year, reflecting a slightly faster rate of growth in productivity (two per cent) than in employee compensation (1.5 per cent). At least that broke the four-year trend to 2005, when 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.
That meant that Malta had lost competitiveness, relative to the euro area. How that impacts on exports depends on the shifts in unit costs, as converted by the relevant exchange rate, in Malta's competitor economies. Last year our exports did reasonably well, and gave an important push to the real growth rate.
The Central Bank does not forecast a similarly strong push this year. Exports are expected to grow, but imports are forecast to rise more than sales abroad. Whilst the bank is forecasting growth at between 2.8 and 3.4 per cent this year, it expects the expansion to be derived more from consumption and gross fixed capital formation, than from exports.
Consumption-driven economic growth is not splendid news, especially for an open economy like ours. The extent to which the expected increase in gross fixed capital formation is good enough news depends on the private sector export oriented investment element within the capital formation aggregate.
Economic performance this year will depend on the balance in the mix that will make it up. A slowing inflation rate helped by a weaker dollar and the impact on exports of softer currencies in their destination countries will produce a balance that is difficult to forecast. There can be no doubt, however, that - euro adoption apart - a restrained inflation rate is essential.
In that regard some of the movements in the sub-indices of the Harmonised Index of Consumer Prices require a closer look. For instance, there was a 9.4 per cent jump in the clothing and footwear indices, mainly due to price increases in garments, shoes and other footwear.
Import prices and profit margins would have been at work there, exceeding it seems the cushioning effects of strong competition in the sector. The hotel and restaurant index was up by 1.9 per cent, brought about by higher accommodation costs, reflecting a seasonal end to one of the downward drivers in the 12-month average rate of inflation.
Beyond the indices, tourism seems to be doing somewhat better than in the recent past, though it is still considerably away from the desired level in terms of length of stay spending and spread-out arrivals.
The net effect of the signals from the various economic indicators is that the economy too is in a hesitant springtime. That does not assure a glorious summer, but better a slightly warm if variable climate, than continuing bitter cold.
In operational and policy terms, it cannot have been similarly ignored. Certainly, the unit responsible to purchase fuel supplies would have been peering closely at the dollar movement and placing careful buy orders, on a both a spot and forward basis.
The international price of oil is set in US$. Despite the dollar's downward trend the price has remained fairly stable. That allowed for purchases to be covered at lower Lm rates. How that translated exactly into the final forward cost of both oil and the US$ would be the basis on which purchases are decided. A policy of careful buying on a moving average basis should be reflected in a falling or at least stable fuel surcharge in the months ahead.
That should help to rein in the domestic inflation rate. On Monday the NSO announced that the rate (measured by the 12-month moving rate, measured by the Harmonised Index of Consumer Prices) had dropped to 2.2 per cent in March, from 2.4 per cent in February. This confirmed that a gently sloping downward trend had developed since November.
Which was good news in the context of Malta's application to adopt the euro. That conclusion is not definite, as yet. Much will depend on the 12-month inflation rate registered this month and in May. The pointers are that Malta should remain below the average inflation rate of the best-performing three economies within the European Union.
The weaker dollar and its impact of underlying fuel prices should give a helping hand. That is one side of the dollar-euro exchange rate picture. Another side suggests less good cheer. Export companies which denominate their sales in US dollars are having a tough time. A weaker dollar rate relative to their base Lm costs, allowing for imports, pinches their profitability, unless higher productivity makes up for the marginal erosion.
Obviously, not all companies record the same shifts in productivity. The overall movement - as reminded by the governor of the Central Bank in that institution's annual return for 2006, tabled in the House of Representatives on Monday - has not been heartening. Unit labour costs dropped by a half of one per cent last year, reflecting a slightly faster rate of growth in productivity (two per cent) than in employee compensation (1.5 per cent). At least that broke the four-year trend to 2005, when 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.
That meant that Malta had lost competitiveness, relative to the euro area. How that impacts on exports depends on the shifts in unit costs, as converted by the relevant exchange rate, in Malta's competitor economies. Last year our exports did reasonably well, and gave an important push to the real growth rate.
The Central Bank does not forecast a similarly strong push this year. Exports are expected to grow, but imports are forecast to rise more than sales abroad. Whilst the bank is forecasting growth at between 2.8 and 3.4 per cent this year, it expects the expansion to be derived more from consumption and gross fixed capital formation, than from exports.
Consumption-driven economic growth is not splendid news, especially for an open economy like ours. The extent to which the expected increase in gross fixed capital formation is good enough news depends on the private sector export oriented investment element within the capital formation aggregate.
Economic performance this year will depend on the balance in the mix that will make it up. A slowing inflation rate helped by a weaker dollar and the impact on exports of softer currencies in their destination countries will produce a balance that is difficult to forecast. There can be no doubt, however, that - euro adoption apart - a restrained inflation rate is essential.
In that regard some of the movements in the sub-indices of the Harmonised Index of Consumer Prices require a closer look. For instance, there was a 9.4 per cent jump in the clothing and footwear indices, mainly due to price increases in garments, shoes and other footwear.
Import prices and profit margins would have been at work there, exceeding it seems the cushioning effects of strong competition in the sector. The hotel and restaurant index was up by 1.9 per cent, brought about by higher accommodation costs, reflecting a seasonal end to one of the downward drivers in the 12-month average rate of inflation.
Beyond the indices, tourism seems to be doing somewhat better than in the recent past, though it is still considerably away from the desired level in terms of length of stay spending and spread-out arrivals.
The net effect of the signals from the various economic indicators is that the economy too is in a hesitant springtime. That does not assure a glorious summer, but better a slightly warm if variable climate, than continuing bitter cold.