“Progressing safely in a riskier world” was the theme and main message of the traditional policy speech delivered by Dr Mario Vella, Governor of the Central Bank of Malta, at the recent annual dinner of the Institute of Financial Services.
Although the international environment is increasingly characterised by heightened political turbulence, by uncertainty regarding trade policies, by the Brexit unknown and by concerns related to climate change, Malta will continue to experience positive economic growth in 2020.
Although Malta is a small economy with a relatively high exposure to the international business cycle, Dr Vella observed that it has maintained its resilience. In 2018, GDP grew by 6.8%, the second highest rate in the European Union. This mainly reflected a very robust expansion in domestic demand. Although smaller, the contribution of net exports was also positive, reflecting continued export growth. While GDP growth moderated in the first half of 2019, at 4.7% it remained comfortably above the euro area average of just above 1.0%.
The Central Bank of Malta expects the positive momentum in Malta to persist in both 2019 and 2020. Domestic demand is foreseen to remain the main driver of economic activity. Favourable labour market conditions, as reflected in a further decrease in unemployment since late 2018, and a dynamic, albeit gradually normalising housing market, should continue to support household income and private consumption. Moreover, growth in government consumption will remain elevated, as Government is expected to use some of its fiscal space, while investment is expected to maintain a high share in GDP, reflecting the substantial upgrade to Malta’s infrastructure.
Nevertheless, Dr Vella warned, growth is set to moderate compared with 2018, reflecting two main factors. Firstly, given the less favourable external environment, we foresee lower contributions from exports. Secondly, it is to be expected that an economy that has been growing very fast to gradually return to rates that are more in line with its long-term growth.
Indeed, Malta is one of few countries in the euro area which has the fiscal space necessary to mitigate the effects of weaker foreign demand. Ideally Government should utilise this space to enhance the economy’s capital stock and potential growth.
Dr Vella stated that the Central Bank of Malta fully supports Government’s determination to strive for the highest standards of Anti Money Laundering and Combating the Financing of Terrorism.
Dr Vella argued that further investment in human capital is also necessary. Malta’s positive economic record is also partly reflected by a growing influx of foreign workers. Although foreigners, including non-EU nationals, are present in all sectors and at all levels, their employment has increased mainly in professional and administrative support services and not, as is sometimes claimed, in sectors characterised by lower skill levels.