It can be estimated, but not observed. The Central Bank devotes much effort to estimating Malta’s potential output growth and its underlying determinants. Growth in potential output can be largely ascribed to structural reform measures that bring about changes in the factors of production, namely labour and capital, and the way they are combined, or productivity. We estimate that the potential growth rate of the Maltese economy has more than doubled from below 2% at the time of the global financial crisis to over 4% today. This partly reflects a steady increase in the labour supply, coming from higher female participation in the work force, measures to increase the effective retirement age and the influx of foreign workers, mainly from EU countries. Apart from the increase in labour  supply, the quality of human capital has also improved. At the same time, a pick-up in investment, partly driven by developments in the energy sector, has boosted the capital stock. However, there is ample scope for improvement of labour productivity in the coming years. Indeed it is critical that it must improve. A sound and stable financial system is an essential pre-condition for strong and sustainable economic performance. The performance of the domestic financial system, especially the core domestic banks, which have the strongest linkages to the domestic economy, remained sound with strong capital ratios, high liquidity and remained very profitable despite the challenges of a prolonged low interest rate environment.
This means that action needs to be taken in those policy domains where we do enjoy some freedom of manoeuvre, that is, fiscal policy, macro-prudential policy and structural reforms. Policy recommendations: On the fiscal front, the recent developments I have just highlighted are encouraging. I would stress the importance of meeting our fiscal targets in terms of structural adjustment and reduction in the debt ratio. Apart from compliance with domestic and European fiscal rules, it is important for Malta to build up sufficient fiscal buffers to allow us to counter eventual adverse economic shocks with fiscal policy if needed. In this regard, judicious control of government expenditure is  Page 6 of 8  essential, bearing in mind that some important government revenue streams may be past their peak and need to be replaced through new initiatives. Enhancing labour productivity is critical - forgive me for possibly boring you by repeating myself but I am sure you will agree with me that better bored than sorry. This requires ongoing investment in our labour force, in our people. In terms of the general business environment, it is important to ensure that Malta remains an attractive location for investment, especially foreign direct investment. We need to keep costs competitive, not only labour costs but also the costs of ancillary services including energy, transport and finance, as well as transaction costs generally. Permit me, at this point, to stress the importance of containing the asymmetries of knowledge facing investors, especially foreign direct investors.