While the outlook for the Maltese economy remains bright, we have to acknowledge that the external environment is becoming less supportive than we expected a year ago, or even three months ago. Some of the external downside risks flagged by the Bank in recent projection rounds have started to materialise. Global economic growth has become more diverse across regions, with soft indicators suggesting that global trade is losing the buoyancy seen in 2017. Partly in response to the less benign economic conditions abroad, activity has also softened in the euro area. The less favourable international environment partly reflects new restrictions on trade and the response of businesses’ capital spending plans. In late 2017 and also in the course of 2018, the United States introduced additional trade protectionist measures, which have been followed by a degree of retaliation. Although these actions mostly concern trade between the United States and China, the overall impact may be considerably broader once global value chains and the effects of uncertainty on private spending are taken into account. This assessment is broadly confirmed by the latest assessments published by the IMF in October, and by the OECD a week ago. Indeed, year-onyear growth in world trade has slowed to 3.2% in the first half of this year, from the relatively fast  Page | 2  growth of 5.0% recorded in 2017, while growth in container port traffic averaged 3.9% in the first nine months of this year, down from 6.5% in 2017.
That the Riksbank should aim to stabilise inflation follows from the Act’s price-stability objective, which the Riksbank has chosen to specify as an inflation target of 2 per cent. That the Riksbank should stabilise resource utilisation follows from the fact that the preparatory work for the Act states that the Riksbank “without prejudice to the price-stability target, should support the goals of general economic policy with a view to maintaining a sustainable level of growth and a high rate of employment”. 3 So what can the Riksbank do in order to achieve sustainable growth and high employment without prejudicing the price stability objective? Well, the best thing the Riksbank can do is to attempt to stabilise resource utilisation around a normal level. But why around a normal level? Surely, a higher level of output and employment than normal would be better? Yes, but it is beyond the power of monetary policy to increase the average level of output and employment and thus increase average resource utilisation. To increase the average level of resource utilisation one would have to use areas of policy other than monetary policy, for example a structural policy designed to improve competitiveness and the workings of the labour market. Unfortunately – as 40 years of experience have shown and 30 years of research have explained – attempts to use monetary policy to keep resource utilisation above the normal level only result in average inflation being higher than the target without raising the average level of resource utilisation.