The world economy is indeed facing a very difficult period when even good news is often tainted with underlying bad news. The sharp slide in the price of oil and other commodities should have been hailed as unequivocal good news for most economies. But in reality when one delves deeper, there is much less reason to be euphoric about these developments.
Many economic analysts argue that the main reason why commodity prices are sliding is that the slowdown in worldwide economic growth is gaining momentum and demand for these commodities is falling. Of course, we all know what an economic slowdown means, especially in the context of inflation that is still far too high: failing companies and rising unemployment.
Even locally the good economic news making the headlines is somewhat tarnished by underlying weakness that do not augur well for the future. For instance, while the Maltese economy continued to grow in the second quarter of 2008, the eurozone economies as a whole showed negative growth of 0.2 per cent in the same period. Good news indeed. However, the bad news is that our inflation rate at 5.6 per cent is far too high and much higher than that registered in the eurozone as a whole. This is making us less competitive.
Moreover, as stated in the most recent edition of the CBM quarterly review "growth (so far this year) was underpinned by buoyant domestic demand, particularly consumption and inventory accumulation. In contrast, net exports contributed negatively to growth, as exports contracted at a faster pace than imports". We need hardly stress that our future economic prosperity depends on our ability to export more goods and services, rather than public and private consumption.
Even in the tourism sector, despite encouraging growth in the number of tourists visiting Malta in the first half of this year, there are clear signs that all is not well with our future prospects. The slowing economies in the countries from where the majority of our tourists come, our inability to enhance our tourist product in the shortest possible time, and signs of decreasing competitiveness could pose serious threats to the growth of this economic sector.
The managers of our economy face a formidable task to fine tune the monetary and fiscal policies needed to counter the economic threats that are hitting us like they are hitting everyone else. The ECB, like the Bank of England and the Federal Reserve, has to face a cruel dilemma of having to deal with supply shocks, financial crisis and inflation at the same time. There is obviously no one common remedy that can resolve all these issues at once.
The Federal Reserve chose to prioritise the issue of growth, while the ECB and the Bank of England have so far preferred to tackle inflation. But the strains are beginning to show. Many argue that the ECB was too hasty in raising interest rates recently, thus accelerating the slowdown in the eurozone economies which was already evident. The short-term results will be that some eurozone countries like Italy, France, Ireland and possibly Germany may incur budget deficits in excess of the 3 per cent allowed by the monetary union.
Locally, while our Central Bank cannot do much to tweak with monetary policy to optimise our growth levels, there is certainly more scope for fine tuning our fiscal policy to ensure that while the economy continues to grow we avoid "second round" inflation via higher wages and prices.
However, the long-term challenges will continue to be the most important priorities for our government. These include continued labour market reforms especially to encourage more women to join the labour force, more effective investment in education, and better management of our environment to enhance our tourism product. When we start to see better results in these areas, then good news will indeed be good news.
Many economic analysts argue that the main reason why commodity prices are sliding is that the slowdown in worldwide economic growth is gaining momentum and demand for these commodities is falling. Of course, we all know what an economic slowdown means, especially in the context of inflation that is still far too high: failing companies and rising unemployment.
Even locally the good economic news making the headlines is somewhat tarnished by underlying weakness that do not augur well for the future. For instance, while the Maltese economy continued to grow in the second quarter of 2008, the eurozone economies as a whole showed negative growth of 0.2 per cent in the same period. Good news indeed. However, the bad news is that our inflation rate at 5.6 per cent is far too high and much higher than that registered in the eurozone as a whole. This is making us less competitive.
Moreover, as stated in the most recent edition of the CBM quarterly review "growth (so far this year) was underpinned by buoyant domestic demand, particularly consumption and inventory accumulation. In contrast, net exports contributed negatively to growth, as exports contracted at a faster pace than imports". We need hardly stress that our future economic prosperity depends on our ability to export more goods and services, rather than public and private consumption.
Even in the tourism sector, despite encouraging growth in the number of tourists visiting Malta in the first half of this year, there are clear signs that all is not well with our future prospects. The slowing economies in the countries from where the majority of our tourists come, our inability to enhance our tourist product in the shortest possible time, and signs of decreasing competitiveness could pose serious threats to the growth of this economic sector.
The managers of our economy face a formidable task to fine tune the monetary and fiscal policies needed to counter the economic threats that are hitting us like they are hitting everyone else. The ECB, like the Bank of England and the Federal Reserve, has to face a cruel dilemma of having to deal with supply shocks, financial crisis and inflation at the same time. There is obviously no one common remedy that can resolve all these issues at once.
The Federal Reserve chose to prioritise the issue of growth, while the ECB and the Bank of England have so far preferred to tackle inflation. But the strains are beginning to show. Many argue that the ECB was too hasty in raising interest rates recently, thus accelerating the slowdown in the eurozone economies which was already evident. The short-term results will be that some eurozone countries like Italy, France, Ireland and possibly Germany may incur budget deficits in excess of the 3 per cent allowed by the monetary union.
Locally, while our Central Bank cannot do much to tweak with monetary policy to optimise our growth levels, there is certainly more scope for fine tuning our fiscal policy to ensure that while the economy continues to grow we avoid "second round" inflation via higher wages and prices.
However, the long-term challenges will continue to be the most important priorities for our government. These include continued labour market reforms especially to encourage more women to join the labour force, more effective investment in education, and better management of our environment to enhance our tourism product. When we start to see better results in these areas, then good news will indeed be good news.