This is not the case to the same extent in Malta, where the HICP inflation rate is well above the euro area average. Let me now turn to the role of fiscal policy, which in the context of monetary union is the only national policy tool available for short-term adjustment. In Malta, however, in spite of the remarkable fiscal consolidation achieved in the run up to euro adoption, deficit and debt to GDP ratios are still at a level that allows limited scope for using fiscal measures to support economic activity. I shall elaborate on the implications of this constraint later on. Fiscal prudence is also necessary to safeguard the country’s credit rating and maintain investor confidence. There is indeed growing evidence that investors are increasingly discriminating among euro area countries on the basis of their fiscal outlook. From a budgetary standpoint, moreover, risk premia on long-term interest rates will increase, and the debt servicing burden will therefore grow, if the perception gains ground of a departure from the path of fiscal consolidation. Finally, from a longer-term perspective, a prudent budgetary policy is also required to cater for the growing costs of Malta’s ageing population, as was vividly pointed out in a recent report published by the European Commission, 8 and the still unidentified costs associated with climate change.
Housing market activity has begun to recover, and a widely followed national home price index is up 12 percent over the 12 months ending in September.1 Anecdotal reports suggest that this higher-than-expected increase in home prices is due to a relatively low number of homes for sale. Due to this shortness of supply, there is reason to expect increases in starts going forward. Yet another bright spot on the horizon is the fact that growth prospects among our major trading partners have improved following a few years of lackluster performance which induced a sharp slowing of growth of U.S. exports. In particular, the euro area appears to have emerged from a protracted recession and is experiencing modest but positive growth. To summarize, while growth in 2013 has been disappointing, I believe a good case can be made that the pace of growth will pick up some in 2014 and then somewhat more in 2015. The private sector of the economy should continue to heal, while the amount of fiscal drag should subside. Despite near-term concerns, growth prospects among our major trading partners will improve further next year. This combination of events is likely to create an environment in which business investment spending will strengthen. As growth picks up, I expect to see more substantial improvement in labor market conditions and a gradual updrift in inflation back towards the FOMC’s target rate. However, the notion that the economy will grow more swiftly remains a forecast rather than a reality at this point.