In a recently published study, Central Bank of Malta staff analysed in detail the effects of increases in government investment on the Maltese economy under different financing scenarios. Under all financing scenarios considered, an increase in government investment is expansionary throughout. In the short run, the expansionary effects are limited to demand-side effects. However, as government capital stock accumulates, significant supply-side effects begin to kick in. A higher  Page | 2  government capital stock helps reduce marginal costs, boosting factor productivity and helping to crowd-in other private factors of production. The reduction in economy-wide marginal costs in turn should lower overall prices, boosting competitiveness and exports. In line with other analyses, the study also shows that even if not debt-neutral, using fiscal space to finance government investment has the strongest effects on real activity in the short-to-medium run. A debt-financed 1 percentage point increase in the government investment-to-GDP ratio increases real GDP by 1.5 percentage points from its baseline level by the fifth year. Even if the investment ratio returns to its pre-shock level, GDP would still exceed its baseline level by around 1% by the tenth year. Thus, an expansion in public GFCF expenditure can help mitigate the negative impact that weaker external demand might have on Malta’s economy. Further investment in human capital is also necessary. Malta’s positive economic record is also partly reflected by a growing influx of foreign workers. These now account for around a fourth of all employment.
Developments in the USA play a key role here and the recovery that is expected to begin next autumn presupposes that the housing market there has stabilised, that the repercussions of the financial crisis have faded and that employment has begun to increase again. As the international forecast is highly uncertain, this also applies to the recovery that is predicted to take place here in Sweden next year. When it comes to inflation, it is of course impossible to deny that it is uncomfortably high today. However, I do not believe that the outcome figures contain evidence that shows that the price increases for oil and other commodities have spread to other areas. The repo rate increase in July was also intended to prevent such contagion effects. The risk of these effects has also declined recently, partly due to the fall in the price of oil and other commodities and partly because economic activity is declining. The development of productivity has been a disappointment and we do not have a really good explanation of why it has been so weak. Weak productivity also helps to keep cost pressures high. However, I was more worried about this earlier when economic activity was higher and the pressure on the labour market was stronger. In the current economic situation it is probably difficult for the companies to pass cost increases on to the consumers. There is every reason to continue to keep a close eye on inflation expectations as they are still some way above the inflation target.