The International Monetary Fund does not think so, according to their assessment of the economy in October last year. Government, on the other hand, believes it can not only sustain growth at higher than 3%, but even better it.
But the bigger question to ask is whether the country can afford to see economic growth slide, even if marginally. With Lawrence Gonzi’s government churning out a fiscal expansionary budget for 2008, there is little room for downward manoeuvre. Economist Edward Scicluna was among the first to announce this predicament when Gonzi read out the budget in October.
Government functionaries, foremost among them Parliamentary Secretary Tonio Fenech, beg to differ. Fenech has gone on record stating that government’s calculations were drawn up on a conservative estimate for growth and tax revenue, making sure that government had a comfortable safety net if things didn’t go quite as predicted.
But it is not only the incumbent administration that cannot afford a drop in economic growth. A prospective Labour government would also require a booming economy to be able to finance its lucrative fiscal, economic and social proposals.
In this respect both major political parties will have their eyes trained on how the economy will be performing.
2008 will not be an easy year. There are international factors that will weigh heavily on how the economy will perform. Oil prices are unlikely to yield. Profit taking by major oil companies in recent days jacked down the price slightly but immediately shot up when Benazir Bhutto was assassinated. The international oil markets remain very fragile and susceptible to major world incidents.
Increased demand for oil by growing affluent populations in China and India coupled with lack of investment in new oil exploration technology will continue to put a strain on the oil markets.
Malta will not be immune to this situation. Even if fuel oil, which is burned in our power stations, does not immediately reflect the price changes in crude oil, over a span of months the country would be expected to fork out more money to fuel its economy and lifestyle.
This will either drag down the economy with people and companies paying more in fuel surcharge costs for the second half of the year or if Labour is elected, pay less for their bills but expect supplementary taxes to sustain government’s increased subsidy.
The price of cereals will also take its toll on the cost of living during 2008. Milk, cheese, pasta, bread and other staple foods experienced hefty price hikes during the latter half of 2007 and there is little to suggest that a reverse trend will occur in 2008.
But there will also be domestic factors that can have an adverse impact on the economy. Being an election year, 2008 will in all likeliness be no different than other election years when the economy slows down because of delayed investments and lower consumption.
The plus point is that the economic programmes of the two mainstream parties do not differ much and little or no shockwaves are to be expected if a change in government does happen. This was noted last year by international credit rating agencies.
Nonetheless, a measure of slowdown is the norm and procrastinating election day will only put a heavier drag on the economy, which will be expected to last at least for the first half of the year.
The Opposition Leader’s sudden hospitalisation for surgery may have closed off all possibilities for an election in February or early March, unless the Prime Minister wants to risk being labelled ruthless for confronting his ‘enemy’ when he is at his weakest.
This means that an election will be all the more likely for May and this does not bode well for an economy that would have started to come out of the uncertainty caused by the currency changeover.
There is little doubt that the euro is a boon for business but it will certainly cause mayhem in the first quarter of the year that could also lead to lower domestic consumption.
Of particular interest domestically and internationally will be the euro’s strength against the dollar. With the IMF pointing out that the dollar is losing ground in foreign exchange reserves worldwide, 2008 is likely to experience a prolonged period of weakness for the dollar.
Coupled with a strong euro, this is a double-edged sword for Malta’s economy. A weak dollar means that we would be importing our oil on the cheaper side, but it also means that exports invoiced in dollars will find it hard to compete on an international level. Even if much of Malta’s exports are towards the EU, the largest manufacturing firm, STMicroelectronics, invoices in dollars and this could be bad news for the company and the country.
2008 may be the year of reckoning for ST in Malta. The multinational company has closed all its manufacturing facilities in Europe except the Kirkop plant. In Gonzi’s budget discourse and subsequent discussions on the economy, ST was never mentioned once with the primary focus being pharmaceutical companies, financial services firms and IT enterprises. This may have been a forewarning that not all is well at ST and in 2008 we may expect to hear some bad news from Kirkop.
On the positive side Maltese interest rates have fallen to come in line with the European Central Bank’s parity rate, which has been kept stable for the past few months. France has been calling on the ECB to lower interest rates given the strength of the euro against the dollar and the yen, in a bid to restore Europe’s international competitiveness.
On similar lines former Finance Minister John Dalli has gone on record saying that government should be lobbying hard in Brussels to influence the ECB’s direction to aim for currency exchange stabilisation, which will be beneficial for competitiveness.
Given the manufacturing industry’s lacklustre performance, France’s calling may be Malta’s in 2008 now that the country is a eurozone member and thus fully-integrated into the EU’s economic structure.

ksansone@mediatoday.com.mt