The inflation rate, which has been consistently higher than the euro area average, is a "source of concern", the Central Bank of Malta said in its first quarterly review for the year.
In its overview of the economy, the Bank said that in the deteriorating international environment it was "more important to keep domestic costs and prices in check".
It called for more competition in prices for products, both at wholesale and retail level.
Although the economy grew by 1.6 per cent throughout 2008, it ended on a negative note in the last three months after experiencing a slowdown between July and September.
Growth declined by 1.2 per cent in the last quarter as a result of a deceleration in private consumption and drops in investment and government consumption.
Investment spending on its own fell by over a third.
Reduced spending on construction projects reflected the slowdown in the real estate market, with property prices maintaining their downward trend.
Weaker foreign demand contributed to the sharp decline in real exports. However, the manufacturing sector had been experiencing a drop in sales long before the international recession took root.
Manufacturing sales had already dropped by €49.2 million in 2007. In a turn for the worse, sales deteriorated by €183 million in 2008.
As for the jobs market, the Bank said that in the 12 months to November 2008 the number of full-time employees increased by 2,217. The public sector experienced a loss of 1,030 jobs, which was compensated by 3,237 new jobs in the private sector. Over the same period, the number of part-time jobs rose by 2,117.
The Bank noted that the general government deficit widened to 4.7 per cent of GDP in 2008, up from 2.2 per cent in 2007. More than half of this rise was attributable to one-off expenditure items, notably the early retirement schemes for shipyard workers and additional subsidies to the energy sector. Revenue growth also moderated.
The deterioration in public finances meant that the government had limited room for manoeuvre.
The Bank said targeted measures to improve the economy's productive capacity and its cost competitiveness could "to some extent, allow for a more active role of the public sector". It cautioned though that, at the same time, the government had to control expenditure and keep the deficit in check because an aging population was contributing to higher pension costs, which were having an impact on public finances.
ksansone@timesofmalta.com