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ment finances and external transactions. This is, broadly speaking, the same assessment as that made by the European Commission in their Autumn 2017 forecasts. In fact, the Commission’s experts are forecasting that this year and over the next two, Malta will have the highest current account surplus as a percentage of GDP of all euro area countries, “beating” countries such as Germany and the Netherlands.

Whereas, going forward, growth is expected to moderate somewhat, Malta will continue to outperform significantly the euro area. The Commission’s Autumn 2017 Forecasts put us at the head of the league table both in terms of real GDP growth and employment increases. Though there are downside risks stemming from more inward-looking policies abroad and an uncertain external environment, including the impact of Brexit on the continent’s economy, domestic demand in Malta should continue to grow at a fast rate, particularly as wage growth will boost disposable income while investment is expected to remain sustained.

In last year’s speech I described what we believe are the conditions leading to this performance. Part of our success is attributable to cyclical factors, such as the effects of the ECB’s monetary policy actions to stimulate the euro area economy. Accommodative monetary policy is boosting aggregate demand locally and in our trading partners, and lowering the external value of the euro, which helps our exporters. We also noted how strong government investment, partly financed by EU funds, is helping the Maltese economy.

However, in last year’s speech we emphasised that most of our current economic growth is attributable to structural changes, which have contributed to more than double our potential growth rate since the global financial crisis. On the one hand, this was due to a significant improvement in our labour supply, both in terms of quantity and quality. Part of this is related to inflows of foreign workers, but our success in raising female participation and improving financial incentives to work has played a key role. On the other hand, we have also radically transformed our energy sector, through the linking of our system with the European grid bolstered by investment in new power plants.

The divergence between our growth and that observed in the rest of the euro area is also due to the different performance of our respective financial sectors. Malta’s financial system has proven to be more stable than that of neighbouring countries. Our core domestic banks have remained sound with strong capital ratios, high liquidity and healthy profits.

Asset quality has continued to improve, while banks remained prudent, boosting provisions. We believe that besides being a testament to the prudence of our local banking community, these results are also due to the actions of regulatory authorities.

How to address some of the challenges of our economic success

Rapid economic growth, such as that which Malta is currently experiencing, brings about its own challenges. Opinion surveys confirm how the Maltese have shifted from worrying about the cost of living and economic uncertainty to being concerned about the environment and traffic congestion.

This shift is also evident at the level of policymakers. In fact policy documents, such as the 2018 Pre-Budget Document and the Budget for 2018, have stressed the need to upgrade infrastructure and enhance environmental protection.

Similarly, international institutions have emphasised the need to shift attention towards sustaining growth and making it more inclusive. Going back to the latest IMF Article IV mission, their recommendations focus on addressing housing market pressures, closing the infrastructure gap, upskilling and reskilling the labour force and strengthening innovation.

We would like to discuss some of these challenges, before outlining how we think that our financial sector can play a role in helping to tackle them.

The housing market

In last year’s speech, we touched upon the need to avoid the formation of asset price bubbles. We quoted Central Bank research indicating that house prices were still below their equilibrium fundamental value, but warned that price trends would nevertheless continue to be closely monitored.

House prices, as you know, have continued to rise. National statistics data suggest an increase of 5.3% during the first half of this year, as against 6.1% in the same period of 2016 and 3.2% in 2015. That said, housing supply is responding to the high demand that is contributing towards house price inflation. In the first seven months of 2017 building permits were 62% higher than they were in the same period of 2016 and 153% higher than in 2015.

This increased supply, unless there is a further acceleration in demand, should result in housing price inflation moderating. This should also help to reduce pressure on the rental market, where there is evidence that from being at the lower end of cross-country rent-to-wage ratios, we have moved relatively quickly to being close to ratios found in the most expensive European cities.

Besides the impact that this rise could have on our capacity to attract foreign workers, we need to consider its impact on Maltese tenants, which in turn will impact on the broader costs of doing business and, consequently, competitiveness.

We believe that, going forward, if we continue to grow at the rates observed in recent years, we will need to have a much more dynamic housing market.