CBM projects slower economic growth this year

Malta’s real GDP growth is this year expected to decelerate to between 2.3 percent and 2.9 percent from 3.8 percent last year owing to a weakening in private consumption and the anticipated deceleration in the economic activity of Malta’s main trading partners, the Central Bank has said.

The projection was made in the Central Bank’s annual report, issued this morning.

The report also says that the contribution of net exports is forecast to improve, in part due to slower growth in imports, while the pace of investment and government consumption is projected to recover. Because of the persistent rise in imported food and energy prices, the bank expects the average HICP inflation rate to lie within a range of 3.5% and 3.9% in 2008.

Central Bank Governor Michael Bonello, who spoke at a business breakfast to launch the report, said Malta faced the policy challenge of maximizing the benefits of eurozone participation by introducing further reforms designed to strengthen its international competitiveness.

A first condition for meeting this challenge was to ensure that fiscal policy remained supportive of macroeconomic stability.

“Not only would any slippage in the pace of fiscal consolidation breach the terms of Malta’s commitment under the Stability and Growth Pact, but it would also delay the planned reduction in the debt ratio to below 60% in 2009. Such developments would negatively impact investor confidence.”

Moreover, given the policy constraints typical of a monetary union, fiscal policy was the only short-term countercyclical instrument available at the national level. For this reason too, therefore, the early achievement of a balanced budget was a desirable objective.

“This consideration assumes greater weight at a time when demand in Malta’s major export markets is slowing down.”

Mr Bonello insisted on the need for expenditure restraint, particularly in view of rising cost pressures caused by ageing-related factors such as pensions and health care. This approach, he said, would eventually create space for further lightening the burden of taxation. It would also allow more resources to be channelled into growth-enhancing activities, thereby helping to boost productivity.

“The latter should indeed be a priority goal because a consistent improvement in productivity is still needed to restore Malta’s competitiveness vis-à-vis the euro area back to where it was at the start of the decade.”

He said that while in recent years, the economy made efficiency gains largely as a result of privatization and trade liberalization, progress in strengthening productivity further would have to be made elsewhere.

“A critical condition for increasing competitiveness in a monetary union is to ensure that wage increases are matched by productivity gains and that product and labour markets are sufficiently flexible. It is particularly important to avoid upward pressures on costs as a result of rigid labour market policies and practices at a time when some skill shortages are emerging.”

This, he said, was of greater relevance for Malta’s open economy when growth prospects in its main export markets were weakening. There was also the added risk that lower demand levels in these markets would not be accompanied by commensurate declines in international commodity prices, including oil. In such circumstances, the risk of higher inflation may well limit the ability of monetary policy at the euro area level to address concerns related to slow growth, he warned.

The business breakfast was organized by the Malta Business Weekly.