expected to be modest. the commission forecasts growth rates of 0. 7 per cent in 2010 and 1. 5 per cent in 2011. foreign demand is seen as the main engine of growth, while the required de - leveraging of balance sheets in the financial sector, along with excess capacity and unemployment heading for double digit levels will continue to weigh on domestic demand. in short, a recovery that will be both weak and protracted by historical standards, and characterised by credit constraints and reduced levels of consumption and investment, as both consumers and firms seek to repair balance sheets. in the process, export markets will become more competitive. the imf ’ s forecasts, published in the world economic outlook ( october 2009 ), cover 2009 and 2010. the forecasts in the european commission ’ s autumn 2009 economic forecasts extend to 2011. … could benefit the maltese economy although euro area membership cushioned the domestic impact of the global crisis, the economy ’ s resilience has come under strain. as expected in an open economy, the shock was transmitted primarily through the trade channel as external demand shrank. following average annual growth of almost 4 per cent in 2005 - 2007, the pace slowed to 2. 1 per cent last year. the contraction was particularly pronounced in the manufacturing and tourism sectors, though ongoing expansion in the services sector mitigated the overall decline. the government measures targeted to support affected companies, moreover, served to contain job losses, such that the unemployment rate has remained below that of the euro area. until very recently, inflation, however, has failed to drop as fast as in the euro area, acting as a drag on purchasing power. these trends produced a sharp drop in output in the first half of the year and the bank expects annual real gdp to shrink by about 2. 2 per cent. looking ahead, we expect economic activity to pick up over the next two years, but growth, while positive, will likely remain below trend. exports will be conditioned by weak growth prospects abroad and by unfavourable cost trends in the price - sensitive electronics and tourism sectors. private consumption should remain relatively subdued on account of continuing high unemployment and slow income growth. in this scenario, the risks to the domestic macroeconomic outlook could tilt to the downside if the expected revival abroad fails to materialize and if investment falters. so while the impact of the recession has not been severe and seemingly effective counter measures have been, and continue to be, taken, there is clearly no

, a precondition for achieving more rapid growth, which in turn is the key to accelerating convergence with euro area income levels. faster growth is achievable but depends on … the roman writer ovid said that times change and we change with them. that may be so, but what really matters in today ’ s circumstances is how rapidly we read the signs of the times and adapt to them. i will focus on three directions of necessary change. the first is towards greater competitiveness. the second, and related thrust, would be to promote higher productivity. the third focuses on fiscal consolidation and the pursuit of sound public finances. before proceeding, however, i should stress that none of these objectives is attainable without further structural reforms, debunking the popular notion that the state has an unlimited capacity to satisfy demands for free goods and services and an end to inefficient practices that involve subsidies. … greater cost competitiveness … first of all, in malta ’ s case sustained economic growth depends largely on our ability to attract export - oriented foreign direct investment. given the past increases in unit labour costs, the only way of maintaining a competitive edge is by ensuring that these costs rise by less than those of our competitors. the magnitude of the task is compounded by the fact that a high proportion of malta ’ s exports go to non - euro area countries whose currencies have tended to depreciate against the euro. in this regard, the example of germany is significant. despite the appreciation of the euro, the real effective exchange rate based on unit labour costs actually declined by almost 2 per cent in 2000 - 2008, primarily because wage growth was moderate and was, in any case, accompanied by productivity gains. the resulting strong competitive position enabled germany to take full advantage of the global rebound, becoming one of the first, and few, countries to register positive growth in the second quarter of this year. there is a clear message implied here, that wage adjustments not accompanied by more efficient production methods result in a gradual erosion of a country ’ s competitiveness, especially when inflation is driven by internal cost pressures as in malta today. a priority task, therefore, should be to change market structures and practices that tend to distort prices. a parallel endeavour should be to foster a culture where wage increases reflect higher productivity. the first challenge then is inflation. we cannot compete successfully in export markets if prices rise faster here than abroad. for instance, despite the downward correction in global