The European Union’s latest economic forecast for Malta is overall positive and clearly indicates that the economy is recovering slowly. While there is room for optimism, there are still areas such as job generation and exports that need to be tackled aggressively.

Last year was positive for the Maltese economy. After two years of negligible growth, the economy rebounded positively and Gross Domestic Product (GDP) growth was 2.5 per cent – an extremely good performance when one considers the tough fiscal exercise introduced by the government.

The government set out last year to reduce public debt and to cut the deficit to under three per cent of GDP. Although public debt has been reduced, it is still above the Maastricht threshold of 60 per cent; but at 3.3 per cent of GDP, the deficit is well under control. According to government estimates this should go below the three per cent mark in 2006. A massive achievement.

One factor that needs to rebound much faster, however, is the rate of GDP growth. According to the EU’s latest estimate this is expected to slow down from 2.5 per cent last year to 1.75 per cent this year. GDP will again accelerate to around two per cent in 2007. While some optimists may argue that this is a decent rate of growth when taken in the context of an EU economy that is only expected to grow by just over 2.3 per cent in 2006, it is also true that Malta needs a growth rate of at least four per cent annually to enable the government to complete its plans without negatively affecting its financial status.

Generating that growth is going to be the major challenge for the government. With economic activity projected to be almost exclusively domestically-driven, reducing the negative contribution of the external sector and increasing export levels will be necessary to boost economic growth.

On the back of an improved outlook for the electronics sector and, to a lesser extent, the tourism industry, exports are also expected to recover in 2006 and to accelerate further in 2007.

At the same time, and as a result of higher export growth and sustained consumption, imports are also expected to accelerate over the forecast period. Net exports are projected to detract around 0.25 per cent from GDP growth.

Boosting economic growth will also depend on the amount and added value of foreign direct investment. Investment is expected to remain the main contributor to domestic demand, however at a slower rate in 2006 owing to the completion of some public infrastructure projects, mainly financed by the Italian Protocol and EU Structural Funds.

Another area that the government will need to focus on this year and in 2007 is job creation. According to the EU report, employment growth is expected to decelerate this year as the labour-intensive construction work related with the Mater Dei Hospital approaches completion stage. Although declines in construction may continue next year, job creation in other activities is expected to pick up owing to improved prospects mainly in the private sector.

The shift from high-volume manufacturing to low-volume, value added industries had somewhat created problems for the economy. This has called for a total rethink of what type of jobs are being created and to what extent the country is able to fill in the vacancies. Job losses in the manufacturing sector should bottom out this year and next, with employment created by nascent sectors such as pharmaceuticals.

The services sector, once again, is expected to remain the main contributor to employment growth, due to further expansion in information technology and financial services activities. Although unemployment is anticipated to rise to 7.5 per cent this year, it should decline marginally next year.

These are all positive signs for the Maltese economy. If these targets are achieved or improved upon, then there is a good chance that the benefits of the government’s hard work to bring its finances in order will start to filter through to the public. This should be the government’s target for 2006 and 2007.

We are cautiously optimistic that this will happen.