In his ANNUAL statement accompanying the Central Bank Annual Report, the governor, Michael Bonello, focuses primarily on the future thrust of economic policy in the light of Malta's recent growth experience and the approaching prospect of full membership of the Economic and Monetary Union (EMU).
The governor welcomes the progress achieved in 2006 towards satisfying the Maastricht convergence criteria and the sustained output growth for that year. He notes, however, that the Maltese economy has not benefited to the same extent as other economies from the favourable global environment of the past three years. This suggests that structural impediments to growth continue to exist.
In this regard, the governor emphasises that, given the policy constraints of membership of a monetary union, an economy can only adjust successfully to asymmetric shocks to the extent that it is flexible and uses its resources efficiently. This is particularly relevant for Malta's open economy since its capacity to generate wealth on a sustainable basis depends on its ability to respond rapidly to changing demand patterns overseas and to offer competitive prices.
Success in such an endeavour depends crucially on how fast labour costs in Malta increase in relation to those of competitor countries. The governor observes that while wage moderation is essential in today's competitive global environment, higher productivity levels are indispensable to sustain economic growth and living standards.
In Malta, he notes, pay growth has been moderate and this helps explain the stability in unemployment levels in recent years. However, it cannot fully account for the slippage in international competitiveness. The latter is partly due to the failure of productivity gains to compensate even for subdued wage growth.
The governor says that a key factor in raising productivity is the quality of human capital and its ability to adapt to the challenge of rapid technological change. This should be addressed through an improvement in the quality of education and the provision of more life-long learning and training; and through increased investment in R&D and innovation.
Investment in human capital must also be accompanied by an effort to strengthen the economy's physical capital base, particularly in the form of new foreign direct investment. Moreover, the Government has a central role to play in the upgrading of both human and fixed capital. Given the current fiscal situation, the only way forward is through a rationalisation of recurrent budgetary expenditures and a reallocation of budgetary funds. This requires broad-based support, particularly that of the social partners, whose co-operation should also be enlisted to achieve greater labour flexibility and more efficient work practices.
The governor further emphasises that the efficient delivery of support services is also essential to achieve faster growth. In addition, efforts to boost output growth should include measures to raise the labour participation rate. In this context, there needs to be a better balance between ensuring adequate support for the unemployed and making work pay.
Concluding his message on the state of the economy, the governor observes that the sustained economic recovery in 2006 suggests that the restructuring process has begun to manifest itself in the macroeconomic indicators. He points out that 2007 could be marked by the expected qualification for membership of the euro area. He stresses, however, that while the adoption of the euro will enhance the economy's capacity to grow faster, the full benefits can only be achieved if further structural reforms are implemented. This will enable the economy to react flexibly and competitively to the new opportunities opening up to it.
In its analysis of economic and financial developments, the report observes that the world economy expanded at a faster pace in 2006, against a background of high oil prices and persistent structural imbalances. While the US economy grew by 3.4 per cent, the euro area surpassed expectations, growing by 2.7 per cent. Meanwhile, inflation in the major industrial countries stood at 2.6 per cent, unchanged from the previous year's level.
Turning to the Maltese economy, the report notes that the economy continued to recover in 2006, with real GDP growing by 2.9 per cent. The expansion was mainly driven by external demand, even though private consumption increased considerably.
The labour market remained buoyant in 2006, with growth in both employment levels and the labour force. The number of registered unemployed fell.
The Annual Report 2006 is available at www.centralbankmalta.com.