This year the global economy was expected to fully recover from its worst crisis since the Great Depression. There has been great optimism in the air and the IMF has been projecting an annual growth rate of 3.75 per cent. This would be the best performance for several years.
The G20 leaders will be meeting in Brisbane in November to find ways of lifting global economic growth by a further two per cent over the next five years. It is envisaged that such increased growth will add $2 trillion to global GDP and generate millions of jobs worldwide. For this to happen it is, however, necessary to have greater policy coordination, especially on monetary issues.
The recovery of the American economy, forecasted to grow by three per cent this year, is meant to power global growth. Finally, the US economy is turning the corner reaping the fruit of its policies to combat the crisis: injecting trillions of dollars into the economy, encouraging ‘re-shoring’ of manufacturing, actively pursuing a cheap energy policy and opting for a weak currency. America is fast regaining its competitiveness, even though internal political squabbles may frustrate the process.
There are indications that the economic prospects for Europe too are brighter. The German economy, which accounts for nearly one third of that of the Eurozone, is projected to grow by 1.8 per cent. The only two countries which are expected to remain in negative growth in 2014 are Slovenia and Cyprus. After two years of contraction in the Eurozone, this is good news for the Maltese economy.
The latest annual report by our Central Bank confirms that the Maltese economy in 2013 grew by 2.4 per cent, outperforming both the Eurozone’s and the EU’s average. It is likely that this momentum will be kept over the next two years. Tourism continues to be the cash cow of the Maltese economy. Last year tourist arrivals improved by 9.6 per cent to 1.6m, with expenditure increasing by 8.6 per cent compared to 2012.
There remain many minefields that could obstruct economic recovery
Inflation in 2013 was down from 3.2 per cent and stood at one per cent. This was partly due to the appreciation of the euro, with the nominal effective exchange rate gaining 4.9 per cent following a slight decline in 2012. This year inflation is set to rise to 1.6 per cent, despite the planned reduction in electricitytariffs announced by government.
The local economy continued to generate significant employment opportunities with the number of jobs increasing by 3.1 per cent over 2012. That this did not lead to a fall in those registering for work is due to various factors including an increase in the supply of labour, a mismatch in skills and a generous social welfare system.
Renewed consumer confidence underpinned much of the growth in 2013. Performance would have been even better (by 0.7 per cent of GDP) had exports not fallen by 5.6 per cent from the level reached in 2012. This drop was mainly due to lower exports of semiconductors and petroleum re-exports.
Domestic demand, stimulated by large projects in energy and construction as well as lower electricity prices, is expected to drive growth over 2014-2015. Also, should global economic recovery continue as predicted, it will impact positively on the export of semiconductors from Malta, helping boost local growth.
Despite this positive outlook at the national, EU and global levels, there remain many minefields that could obstruct economic recovery.
Growing geopolitical tensions, especially between Russia and the West, do not augur well. The crisis situation in Syria seems to be in a deadlock; that in the Ukraine seems to be widening. The mysterious disappearance of Malaysia Airlines Flight 370 has rekindled fears of a new wave of terrorist attacks. Closer to home, the political situation in North Africa, especially Libya, remains highly unstable and can get out of hand anytime.
Even within the EU, politico-economic circumstances remain delicate. The basic wages for most low-skilled workers are not improving, with many hardly affording a decent living. The financial crisis has increased poverty and social exclusion across European society, and this could lead to extreme, or anti-European, parties gaining increased power in next month’s European Parliament elections.
Equally worrying for the EU is the fact that economic recovery is not leading to the creation of new jobs. Unemployment remains unduly high, especially among younger people. Also, EU economic recovery, although relatively widespread, remains very uneven. Structural transformation and financial reforms in southern Europe remain largely incomplete.
Another spectre looming over the European economy is deflation. As has been the case with Japan over the last two decades, deflation creates a negative psychological mood in which both consumers and businesses expect prices to go down further. This results in lower wages and weaker purchasing power which lead to negative growth.
Monetary authorities deem a low degree of inflation (not more than two per cent) as being healthy. At present, the European Central Bank is being accused of not doing enough to fight falling inflation, risking that countries such as Italy, France and Spain be driven into perilous debt traps, undermining the progress they have made in lowering their fiscal deficits.
There is little doubt that economic policymakers have to learn to live with uncertainty. Globalisation has rendered countries increasingly vulnerable to what happens elsewhere. While it is heartening to know that our economy is on the right track, nothing can be taken for granted and we need to remain vigilant to developments around the world.