Over the last five years, Malta’s growth averaged 5.6 per cent, or five times that in the EU and double our pace of economic expansion in the previous decade. That said, in the four decades prior to 2000, our real GDP grew on average by 5.9 per cent, or three times the growth in the 2000s.
Viewed within this perspective, recent growth appears as a return to past performance. This raises three questions. Why were the 2000s marked by a deceleration? What made the economy accelerate again? To what extent can growth be sustained?
The Central Bank’s Understanding the Maltese Economy, published last year, addressed the first two questions. By the early 2000s, growth became too dependent on public spending and private consumption, resulting in deficits in the balance of payments and public finances close to 10 per cent of GDP.
Our economy was hit by lower foreign demand for our two main exports of the time – semiconductors and tourism. The competitiveness of certain sectors hinged on protectionism.
However similar to the transformation in the 1970s from dependence on the UK’s military to an economy with a solid manufacturing and services base, in the 2000s, the foundations of Malta’s current growth started being laid. That decade resulted in substantial restructuring, driven by the adoption of more liberal regulations, the removal of protectionism and wider access to the EU’s single market, particularly in services and labour.
Our economic structure changed dramatically. Diversification, both towards new sectors as well as specific niches within established ones, increased our economic flexibility and resilience, making us less subject to industry-specific disturbances. Besides rising female participation and education levels, the economy also benefited from a strong influx of foreign workers, which ensured an adequate supply of labour.
Malta needs considerable investment to upskill its workers
The Central Bank has just published a comprehensive assessment of the sustainability of Malta’s growth model. This research publication, Challenges And Opportunities of Sustainable Economic Growth: The Case Of Malta, freely available on the Bank’s website (https://www.centralbankmalta.org/file.aspx?f=61596), brings together five articles that besides projecting growth also assesses whether recent trends have led to macroeconomic imbalances.
Our research indicates that Malta’s potential growth has more than doubled. This reflects a strong recovery in productivity, as existing industries were exposed to more competition while increased market access brought to Malta high value-added service operators. There was a turnaround in the crucially important energy sector, which has become efficient and lowered our dependence on imported fuel to produce every unit of output by a quarter. Rising productivity was supported by the positive supply shock of a rising proportion of skilled workers.
Our publication includes a debt sustainability analysis, carried out in line with ECB methodology (including tests against significant adverse shocks). Even under conservative assumptions on fiscal slippage and growth, we find that debt-to-GDP will remain well below the 60 per cent threshold and could fall to close to 40 per cent by 2025.
We analyse the remarkable swing in our balance of payments, the largest improvement in the euro area, which occurred despite the fact that foreign demand was weak. Conversely, structural developments, such as improving energy intensity and falling import content, were key. The latter was also underpinned by a recovery in the national saving rate, driven by better fiscal performance, and rising corporate and household savings.
Ireland and Spain have shown that even countries with sound fiscal and external balances can face problems if they allow asset price bubbles or a rapid expansion of private debt. Using advanced methods adopted by the IMF, we constructed indices of financial conditions and property price valuation. These indicate that growth was not credit-fuelled while house prices remain aligned to fundamentals.
Taken together, these articles provide reassuring results. Large part of the recent acceleration was of a permanent nature. Our research suggests that, over the next years, growth will remain above four per cent and, by 2025, it will settle at 3.25 per cent (based on very conservative assumptions on migration and productivity). While some might interpret this as a slowdown, the European Commission projects GDP growth for the euro area in 2025 at 1.3 per cent, or less than half our projection.
Population ageing creates challenges for our labour supply. Services are more labour-intensive and, while some sectors are freeing up skilled labour, the unfulfilled demand is high. Malta needs considerable investment to upskill its workers as future growth will depend on improved productivity as much as on the expansion of the labour force. The success of our growth model also depends on the country having the right infrastructure, particularly in digital networks and communications, links with trading partners and internal transit.
Traditionally, these fall within the remit of the public sector. However, over coming decades, ageing’s impact on expenditure constrains this. Our next economic transformation requires a more central role for the private sector in research, innovation, education, training and infrastructure besides more innovative ways of leveraging Malta’s large stock of saving, such as through the Development Bank.
Aaron Grech is the Central Bank’s chief economist.