Business leaders have urged the government not to respond to the country's high inflation rate by giving in to wage demands which will affect Malta's competitiveness. They also advised the authorities to respond to the contraction in the eurozone's economy in the second quarter of this year by adapting to change and identifying new growth areas.
Malta's annual rate of inflation in July was 5.6 per cent, the highest in 10 years and higher than the eurozone rate of 4 per cent and the EU 27 rate of 4.4 per cent. Coupled with the fact that the eurozone economy contracted for the first time ever in the second quarter of the year, this has caused some concern among business circles.
Martin Galea, president of the Federation of Industry, said: "Obviously it is a concern that Malta's inflation rate is higher than the European average. The danger is that this will give rise to wage demands which are unsustainable and which affect Malta's competitiveness. The government should not interfere in the market as regards prices, unless there is a breakdown in the market and there is no competition. Instead it should continue to invest in education and infrastructure to ensure that we remain an attractive place where to invest and to do business."
Mr Galea said the 5.6 per cent annual inflation rate was largely caused by the increase in water and electricity rates "which the government had been keeping back but ultimately could no longer afford to do so due to the rising price of oil".
He said that Malta's 12 month moving average rate is more in line with the European average, although it is slightly higher (3.3 per cent vs 3.1 per cent in EU 27).
"Hotel and restaurant prices also rose dramatically, due to the higher take-up of rack rates and more and more people booking their own holidays, a direct benefit of the low cost airlines. It is difficult to pinpoint exactly why there was high inflation in items like clothing and footwear and further study is required," he said.
Regarding the eurozone's contraction Mr Galea said that businesses which are able to adapt to change and keep ahead will do well. "The same applies to the government. It must keep predicting what the growth areas will be and ensure it supplies the necessary infrastructural support, such as an education system that supplies the trained manpower required."
Mr Galea said Malta has not exactly mirrored the European economy in recent years. "While Europe registered significant growth, Malta was in the grips of restructuring. Now Europe has the credit crises as well as the food and oil price squeeze, it may well seem that we might follow suit. But Malta is a small economy and sometimes it takes relatively small things to keep us on track. We have had significant investment from financial, IT, gaming and pharmaceutical companies and these have kept our employment and value added levels up. While oil and food prices will cause issues and some hardship these are worldwide issues which will have to be faced the world over," he said.
Kevin Borg, director-general of the Chamber of Commerce and Enterprise, said it is an undeniable fact that inflation is on a steady increase and this is heavily influenced by international fuel price shocks.
"What is of most concern for the chamber is that the effect of the recent increase in the energy surcharge on local businesses could be further exacerbated by undue pressures for wage compensation which are not commensurate to productivity gains. This could further erode the country's competitiveness position besides potentially leading to further inflation," he said.
However, Mr Borg said that while inflation is definitely of prime concern, the Chamber of Commerce is confident "of the authorities' ability to maintain a long-term stable inflationary environment".
Mr Borg said that economic forecasts for the eurozone had already been revised downwards as it was expected that the European economy would also suffer the effects of the fuel price shocks.
"Indeed, the Maltese economy is among the smallest, most open and on the geographical periphery of its major trading partner bloc. Malta is dependent on a resilient European economy for its tourism and exports of goods and services. The authorities and the private sector must pool ideas and resources to ensure that any decline in incomes of our European customers does not affect demand for Maltese goods and services.
"Again, the Maltese business community has proved time and again that it is more than capable of turning challenges into opportunities. The chamber reiterates that the country must continuously improve its competitiveness position, primarily through a workforce that is knowledgeable and flexible. Ultimately the country relies on its people to act, react and adjust swiftly and effectively to any challenging scenario," he said.
Gordon Cordina, a leading economist, also warned against responding to the high inflation rate through wage increases. The main priority for the government and social partners, he said, is to avoid "from one-off inflationary pressures to transform into a price-wage inflationary spiral, as this would lead to successive and prolonged price increases which would ultimately dent the country's competitiveness and jobs".
"We are therefore to resist the temptation of falling into facile short-term-oriented solutions such as giving extraordinary cost-of-living adjustment increases, as this would only constitute a temporary palliative to the symptoms of the disease, making the disease even worse in the medium term."
Dr Cordina said an effective response to the situation is to adjust consumption patterns so as to avoid, as much as possible, the effects of price inflation, and increase the country's income and productivity so that earnings would grow in a manner which matches and outstrips the growth in prices. "But this would have to come out of genuine productivity, not out of transfer payments," he said.
He emphasised, however, that a category of households in such a situation would be in a greater risk of poverty and it would therefore be appropriate to adequately identify this group and redirect social expenditure to assist them in a focused and targeted manner, in order to maintain social cohesion.
Dr Cordina explained that inflation is rapidly becoming a global problem, fuelled by the prices of energy and food products.
"In a small, open and peripheral economy like ours, international price shocks of this type could have even more pronounced effects, as we are completely dependent on imports for energy and food (at least with regard to inputs towards local production of food), typically have higher transport costs, cannot benefit from price discounts out of bulk purchases and effective market competition may be more difficult to obtain."
He said periods of price shocks would "of course" result in higher inflation and, possibly, more uncertainty in its measurement.
On the contraction of the eurozone economy Dr Cordina said the Maltese economy suffers in periods of international recession, because it is highly dependent on exports.
"The extent of this would, however, depend on the resilience of our exports to fluctuations in global demand. There are products which are very senstive to such fluctuations. These would typically be those oriented towards mass markets and which have no distinguishing charactersitics."
Dr Cordina said there are other products which are more resilient, because they would be directed to market niches which are themselves relatively recession-proof, or are produced in a distinctive manner relying, for example, on a special type of human resource or on innovative abilities.
"The Maltese economy has restructured in recent years in a manner which has made its exports more resilient to global recessions due, for instance, to developments in sectors such as high value added and specialised industry, ICT and financial and consultancy services.
"There remain other areas of exports which will be prone to fluctuations in global demand, including mainly the lower value added type manufacturing and a number of areas in the tourism market. The slowdown in global economic growth will therefore have an impact on Malta's economic activity, the extent of which is however highly dependent on how the domestic economy reacts to the situation, in terms of trying to enhance its competitiveness, from the cost and product offer perspectives, in a bid to win markets in difficult conditions.
"This will place our economy in an even stronger position to reap benefits when global demand eventually recovers," he said.
Finance Minister Tonio Fenech said the government had already warned about the impact of oil and food prices during this year and for that reason had extended children's allowance to all, given the cost of living increase for 2008 in advance, increased pensions and maintained the utility surcharge at 50 per cent until June despite the increase in the price of oil.
"The impact of the food and energy crises has been witnessed all around Europe, with other countries experiencing inflation rates which are much higher than ours. Four countries have actually experienced double digit inflation (+10 per cent)," he said.
"The EU reported that the highest annual rates in July 2008 were experienced in transport (7.2 per cent), food and housing (both 6.7 per cent). Considering the fact that with regard to food and transport Malta depends almost to a full extent on prices determined elsewhere, Malta's rate has to be seen in that perspective.
"Actually, at 3.3 per cent Malta has one of the lowest 12 month moving average inflation rates, exactly at par with the EU average. Of the 12 countries that joined the European Union with Malta in 2004 or later, only Slovakia (3.1 per cent) has a lower 12-month average inflation rate," he said.
Mr Fenech said that the contraction in the eurozone has to be placed in its proper perspective.
"It came about after an unexpectedly good first quarter. While the recorded slowdown, although expected, gives rise to a certain amount of concern, there is still no room for any undue alarm. Indeed, soft data released by the ZEW institute in Germany indicate an improvement in economic sentiment in Germany in August. While this is indeed welcome, it goes to show the level of uncertainty in the economy.
"This uncertainty is certainly not being helped by the still substantial volatility in the financial and commodities markets," he added.
Mr Fenech said his ministry is following all developments abroad and at home very closely and while he does not think that there is any room for alarm, "we must emphasise the need for continued vigilance and prudence in dealing with matters that might somehow impact negatively on our international competitiveness".
He emphasised the need for improved productivity in order to ensure the country's continued competitiveness "which would in turn contribute to safeguarding our standard of living".
Mr Fenech said the government is doing all in its power to maintain a stable macroeconomic environment that would contribute to increased investment and job opportunities.
"It is only thus that we can really mitigate any negative impacts that might result from the volatility in the world economy," he said.
Malta's annual rate of inflation in July was 5.6 per cent, the highest in 10 years and higher than the eurozone rate of 4 per cent and the EU 27 rate of 4.4 per cent. Coupled with the fact that the eurozone economy contracted for the first time ever in the second quarter of the year, this has caused some concern among business circles.
Martin Galea, president of the Federation of Industry, said: "Obviously it is a concern that Malta's inflation rate is higher than the European average. The danger is that this will give rise to wage demands which are unsustainable and which affect Malta's competitiveness. The government should not interfere in the market as regards prices, unless there is a breakdown in the market and there is no competition. Instead it should continue to invest in education and infrastructure to ensure that we remain an attractive place where to invest and to do business."
Mr Galea said the 5.6 per cent annual inflation rate was largely caused by the increase in water and electricity rates "which the government had been keeping back but ultimately could no longer afford to do so due to the rising price of oil".
He said that Malta's 12 month moving average rate is more in line with the European average, although it is slightly higher (3.3 per cent vs 3.1 per cent in EU 27).
"Hotel and restaurant prices also rose dramatically, due to the higher take-up of rack rates and more and more people booking their own holidays, a direct benefit of the low cost airlines. It is difficult to pinpoint exactly why there was high inflation in items like clothing and footwear and further study is required," he said.
Regarding the eurozone's contraction Mr Galea said that businesses which are able to adapt to change and keep ahead will do well. "The same applies to the government. It must keep predicting what the growth areas will be and ensure it supplies the necessary infrastructural support, such as an education system that supplies the trained manpower required."
Mr Galea said Malta has not exactly mirrored the European economy in recent years. "While Europe registered significant growth, Malta was in the grips of restructuring. Now Europe has the credit crises as well as the food and oil price squeeze, it may well seem that we might follow suit. But Malta is a small economy and sometimes it takes relatively small things to keep us on track. We have had significant investment from financial, IT, gaming and pharmaceutical companies and these have kept our employment and value added levels up. While oil and food prices will cause issues and some hardship these are worldwide issues which will have to be faced the world over," he said.
Kevin Borg, director-general of the Chamber of Commerce and Enterprise, said it is an undeniable fact that inflation is on a steady increase and this is heavily influenced by international fuel price shocks.
"What is of most concern for the chamber is that the effect of the recent increase in the energy surcharge on local businesses could be further exacerbated by undue pressures for wage compensation which are not commensurate to productivity gains. This could further erode the country's competitiveness position besides potentially leading to further inflation," he said.
However, Mr Borg said that while inflation is definitely of prime concern, the Chamber of Commerce is confident "of the authorities' ability to maintain a long-term stable inflationary environment".
Mr Borg said that economic forecasts for the eurozone had already been revised downwards as it was expected that the European economy would also suffer the effects of the fuel price shocks.
"Indeed, the Maltese economy is among the smallest, most open and on the geographical periphery of its major trading partner bloc. Malta is dependent on a resilient European economy for its tourism and exports of goods and services. The authorities and the private sector must pool ideas and resources to ensure that any decline in incomes of our European customers does not affect demand for Maltese goods and services.
"Again, the Maltese business community has proved time and again that it is more than capable of turning challenges into opportunities. The chamber reiterates that the country must continuously improve its competitiveness position, primarily through a workforce that is knowledgeable and flexible. Ultimately the country relies on its people to act, react and adjust swiftly and effectively to any challenging scenario," he said.
Gordon Cordina, a leading economist, also warned against responding to the high inflation rate through wage increases. The main priority for the government and social partners, he said, is to avoid "from one-off inflationary pressures to transform into a price-wage inflationary spiral, as this would lead to successive and prolonged price increases which would ultimately dent the country's competitiveness and jobs".
"We are therefore to resist the temptation of falling into facile short-term-oriented solutions such as giving extraordinary cost-of-living adjustment increases, as this would only constitute a temporary palliative to the symptoms of the disease, making the disease even worse in the medium term."
Dr Cordina said an effective response to the situation is to adjust consumption patterns so as to avoid, as much as possible, the effects of price inflation, and increase the country's income and productivity so that earnings would grow in a manner which matches and outstrips the growth in prices. "But this would have to come out of genuine productivity, not out of transfer payments," he said.
He emphasised, however, that a category of households in such a situation would be in a greater risk of poverty and it would therefore be appropriate to adequately identify this group and redirect social expenditure to assist them in a focused and targeted manner, in order to maintain social cohesion.
Dr Cordina explained that inflation is rapidly becoming a global problem, fuelled by the prices of energy and food products.
"In a small, open and peripheral economy like ours, international price shocks of this type could have even more pronounced effects, as we are completely dependent on imports for energy and food (at least with regard to inputs towards local production of food), typically have higher transport costs, cannot benefit from price discounts out of bulk purchases and effective market competition may be more difficult to obtain."
He said periods of price shocks would "of course" result in higher inflation and, possibly, more uncertainty in its measurement.
On the contraction of the eurozone economy Dr Cordina said the Maltese economy suffers in periods of international recession, because it is highly dependent on exports.
"The extent of this would, however, depend on the resilience of our exports to fluctuations in global demand. There are products which are very senstive to such fluctuations. These would typically be those oriented towards mass markets and which have no distinguishing charactersitics."
Dr Cordina said there are other products which are more resilient, because they would be directed to market niches which are themselves relatively recession-proof, or are produced in a distinctive manner relying, for example, on a special type of human resource or on innovative abilities.
"The Maltese economy has restructured in recent years in a manner which has made its exports more resilient to global recessions due, for instance, to developments in sectors such as high value added and specialised industry, ICT and financial and consultancy services.
"There remain other areas of exports which will be prone to fluctuations in global demand, including mainly the lower value added type manufacturing and a number of areas in the tourism market. The slowdown in global economic growth will therefore have an impact on Malta's economic activity, the extent of which is however highly dependent on how the domestic economy reacts to the situation, in terms of trying to enhance its competitiveness, from the cost and product offer perspectives, in a bid to win markets in difficult conditions.
"This will place our economy in an even stronger position to reap benefits when global demand eventually recovers," he said.
Finance Minister Tonio Fenech said the government had already warned about the impact of oil and food prices during this year and for that reason had extended children's allowance to all, given the cost of living increase for 2008 in advance, increased pensions and maintained the utility surcharge at 50 per cent until June despite the increase in the price of oil.
"The impact of the food and energy crises has been witnessed all around Europe, with other countries experiencing inflation rates which are much higher than ours. Four countries have actually experienced double digit inflation (+10 per cent)," he said.
"The EU reported that the highest annual rates in July 2008 were experienced in transport (7.2 per cent), food and housing (both 6.7 per cent). Considering the fact that with regard to food and transport Malta depends almost to a full extent on prices determined elsewhere, Malta's rate has to be seen in that perspective.
"Actually, at 3.3 per cent Malta has one of the lowest 12 month moving average inflation rates, exactly at par with the EU average. Of the 12 countries that joined the European Union with Malta in 2004 or later, only Slovakia (3.1 per cent) has a lower 12-month average inflation rate," he said.
Mr Fenech said that the contraction in the eurozone has to be placed in its proper perspective.
"It came about after an unexpectedly good first quarter. While the recorded slowdown, although expected, gives rise to a certain amount of concern, there is still no room for any undue alarm. Indeed, soft data released by the ZEW institute in Germany indicate an improvement in economic sentiment in Germany in August. While this is indeed welcome, it goes to show the level of uncertainty in the economy.
"This uncertainty is certainly not being helped by the still substantial volatility in the financial and commodities markets," he added.
Mr Fenech said his ministry is following all developments abroad and at home very closely and while he does not think that there is any room for alarm, "we must emphasise the need for continued vigilance and prudence in dealing with matters that might somehow impact negatively on our international competitiveness".
He emphasised the need for improved productivity in order to ensure the country's continued competitiveness "which would in turn contribute to safeguarding our standard of living".
Mr Fenech said the government is doing all in its power to maintain a stable macroeconomic environment that would contribute to increased investment and job opportunities.
"It is only thus that we can really mitigate any negative impacts that might result from the volatility in the world economy," he said.