Last week I was asked to give my reactions to the latest Malta Country Report by the European Commission at a conference organised by the EU Representation in Malta. Such conferences are not only very useful but also provide opportunities for insights into our economy.
Despite one of the lowest levels of GDP per capita and accounting for less than 1 per cent of the total eurozone economy, we have seen consistent economic growth.
This mainly reflects growth in our potential output, which depends on the way the economy is structured, the level of technology and its economic resources.
The economy is expected to grow further this year – around 3 per cent in real terms. What is also evident is that we are moving fast towards more diversified and value-added services, partly explaining why the capital intensity of the Maltese economy is among the lowest in the EU (more pronounced in the private sector).
We have seen labour’s contribution to potential output growth rising as a result of increasing participation by women in the labour force (the largest increase across the EU) amid very low unemployment. The net effect of this is that the gap between actual and potential GDP has virtually closed. The question that needs to be asked is whether this momentum can be sustained in the next few years with relatively low levels of capital intensity in the private sector, an especially-low level of labour efficiency, and levelling out of further increases in participation by women.
These pose challenges to maintaining our economic growth momentum, though there has been a noticeable increase in investment and private consumption in recent months (a significant contributor being government consumption). The increasing shift to value-added services (which would in part explain why our capital investment remains relatively low) has also had a positive impact on our current account of balance of payments, though the continued rise in tourism services has significantly contributed to our exports. The significance of the depreciation of the euro and how it affects our competitiveness cannot be downplayed either. The euro value could further impact the economic growth rate, and our economy is becoming increasingly exposed to the exchange rate of the euro especially as we seek new markets outside the eurozone and in non-EU countries.
The gap between actual and potential GDP (in Malta) has virtually closed. The question is whether this momentum can be sustained in the next few years
The Country Report states that rising employment has masked a “sluggish productivity performance”, and that our labour productivity stood at only a third of the EU average in 2012. The reality is that we have low expenditure on research and development and therefore very limited product innovation
We have known this for years, but can we realistically expect an economy the size of ours to provide a regular stream of innovative solutions and products as in economies the size of Germany or France?
Our innovative solutions are aimed at addressing our perennial problem of scale. Yet there is hardly any recognition for such solutions which have facilitated economic growth in our economy. How else would one explain low levels of unemployment amid increasing participation by women and despite relatively-low levels of productivity?
Though there is further scope for increasing participation, especially among women and older persons, women’s participation is unlikely to increase at the same rate as in recent years. But with an increasing number of vacancies being filled by non-Maltese, any restrictions to labour supply would be offset.
It is evident that such solutions are needed to maintain economic momentum. What we cannot legislate for is the continued unrest around the Mediterranean and the extent of economic recovery in the eurozone. Given our vulnerability to this, our economy’s potential output would need to grow much higher than our eurozone partners’. That is not easy to achieve year in, year out.
Philip von Brockdorff is the Head of the Economics Department at the University of Malta.