Acknowledging Malta’s economic success story

By Aaron Farrugia

Aaron Farrugia is Parliamentary Secretary for EU Funds

We shouldn’t take economic growth for granted. Especially for such a small, open economy like ours.

While it is true that, in the words of the economist E.F Schumacher -- or rather his teacher, Leopold Kohr -- Small is Beautiful, as policy-makers of such countries are more flexible and targeted in their actions, ‘small’ still remains economically challenging.

In the case of Malta, ‘small’ translates into permanent vulnerabilities, such as insularity and diseconomies of scale.

And in this regard, the presence of these vulnerabilities actually shine a brighter light on our economic success story.

The global outlook also puts Malta’s results into a positive context. In a scenario where interest rates and commodity prices remain low or contained, the IMF has recently cut global growth outlook again, now expecting the world economy to grow by 3.3% in 2019, down from 3.7%.

This is mainly due to trade tensions and tighter monetary policies which could hurt the global economy. Closer to home, the ECB President has recently spoken about Eurozone economic data being weaker than expected.

And Germany, Europe’s largest economy, is currently going through a factory orders contraction (as measured by the Purchasing Managers Index), which is being reported as being worse than initially reported.

And what about the Brexit uncertainty?

It has clearly had a negative impact on Britain, as GDP fell 0.3% in December 2018, grew 0.5% in January and just by 0.2% in February (so overall growth for the three months to February was 0.3%).

Real GDP growth cannot be taken for granted.

Euro area GDP growth has never exceeded the 2.5% mark since returning to positive territory in 2014 (highest at 2.39% in 2017). And for 2019, the Euro area GDP forecast stands at 1.3%.

On the other hand, in Malta, during the period 2014 to 2018, GDP growth has registered an impressive 7.6%. The EC’s own forecasts for Malta project growth close to 5% for 2019.

Inflation cannot be taken for granted.

We have gone from worries of deflation a few years ago, to a stable inflation rate which remains below the ECB’s target rate of 2%. The EC forecasts an inflation rate of 1.8% for Malta in 2019, which is approximately the same as last year’s 1.7% rate.

In the meantime, latest figures indicate estimated 2019 inflation rates above 2% for other fellow EU MS, such as Belgium, the Netherlands, and the Czech Republic.

Employment cannot be taken for granted.

Our labour force has converged to EU activity rates in the space of a mere six years, growing from 63.9% in 2012 to 72.2% in 2017, with the activity rate in Q4-2018 standing at 75%.

The EU28 activity rate stood at 73.3% in 2017. In terms of unemployment, this stood at 2.1% in Q4-2018 as measured by the Labour Force Survey.

Again, to put matters into perspective, the unemployment rate in the euro area as at February 2019 stood at 7.8%, with countries registering above average rates including larger economies such as Greece (18%), Spain (13.9%), Italy (10.7%), and France (8.8%).

The budget balance also cannot be taken for granted.

We all recall past local discussions on how to reduce losses in state-owned enterprises, measures to reduce taxes, and excessive deficit procedures. These all seem far off times, with Malta registering its first fiscal surplus in decades in 2016 (0.9% of GDP).

A fiscal surplus, which falls under the concept of fiscal balancing, is a widespread strategy in various countries, especially in Nordic ones.

However, a closer look at other countries’ budget balances indicate a somewhat different picture – Euro area (-1.1%), France (-3.4%), Italy (-2.9%), Spain (-2.4%), Poland (-2.4%) and Britain (-1/6%) are all projected to register deficits in 2019.

Linked to the point on budget balances is the national debt, which is on a downward trajectory and has fallen below the ECB’s 60% threshold since 2015.

Tourism figures are also a KPI which cannot be taken for granted.

Inbound tourist trips in 2018 reached nearly 2.6 million, a staggering increase of 14.3% over 2017.

Again, discussions on whether Malta could ever exceed the 2 million mark now seem distance, with this landmark being exceeded in 2017.

These are both macro- and micro-economic successes – they are the merit of the public sector providing direction, and of the private sector following through with further business direction and investment. But this is not all – the story cannot stop here.

So what comes next?

Success brings with it growth challenges, such as infrastructure and mobility, adapting to changes in technology and the environment, and demographic shifts.

But the economic cushion we’ve built together will allow us as a nation to look positively at these long-standing national challenges, especially if these are actually viewed as opportunities for further growth.

In fact, initiatives and measures to address these challenges will inevitably bring together various economic agents through investment and consumption decisions.

And, as a society and economy, through the process of addressing these challenges, we will be adapting to changing circumstances, thus coming out stronger at the end.

But we cannot take this adaptation for granted – we must work together to achieve it.