economic base, from an economy driven mainly by export - oriented manufacturing industry to one characterised by the increasing importance of export - oriented services. it also engaged in structural reforms to increase competition in key markets and to encourage labour market participation. malta now enjoys rapid growth, full employment and moderate inflation. the latest economic forecast by the european commission, that of winter 2017, shows that malta ’ s economy is expected to remain on a sustained positive trajectory. according to the commission : “ malta ’ s economic growth has settled down from the exceptional levels of 2014 and 2015 but is forecast to remain well above the eu average. unemployment is set to remain at record lows while productivity gains contain unit labour costs and preserve competitiveness. ” malta ’ s real gdp growth is estimated to remain robust. for both 2017 and 2018, the maltese economy is estimated to expand at the rate of 3. 7 %. this places malta amongst the top performers in the eu. during 2017, gdp in the euro area and the eu is expected to grow at the rate of 1. 6 % and 1. 8 % respectively. for 2018 growth in the euro area is expected to increase to 1. 8 % whilst average growth in the eu will remain as in the previous year ( 1. 8 % ). malta ’ s historical low unemployment rates are envisaged to be maintained over the coming period. the ec forecast shows that both for 2017 and 2018, malta ’ s unemployment rate will be 4. 9 %, which is extremely low when compared to the both the euro area and the eu. during 2017, it is expected that unemployment in the euro area and the eu will be 9. 6 % and 8. 1 % respectively. for 2018, unemployment in the euro area is expected to go down to 9. 1 % whilst that in the eu will also decline to 7. 8 %. malta ’ s general government deficit as a percentage of gdp is also expected to continue on the positive trajectory it has embarked on the in the previous years. it is expected to narrow further to 0. 6 % in 2017 and remain at this level in 2018. this figure is also compares favourably to the average deficit ratios projected in the euro area19 ( 2017 and 2018 : - 1. 4 % ) and the eu ( 2017 : = - 1. 7 % and 2018 = - 1. 6 % ). for the first time in many years, malta ’ s gross government debt to gdp is expected to fall below the 60 % threshold.

may spread to many economies – the surge in energy and materials prices and the financial turmoil stemming from the subprime mortgage problem. we cannot totally rule out the possibility that, if these two shocks simultaneously impact heavily on the global economy, business conditions in various industries and firms in various regions might become synchronized, and thus trigger a negative feedback or amplification of adverse effects through interdependency. thus, with respect to future developments in the real economy, we should be attentive to the downside risks. low inflation in the recovery since 2002 and a spike in energy and material prices let me turn to inflation. first i will explain why inflation was almost non - existent from 2002 up until the midyear of 2007. then i will assess the current threat of a possible rekindling of inflation posed by the sharp increase in energy and material prices. as i have explained earlier, real gdp growth had been on average around 2 percent since 2002 until recently, somewhat above japan's potential growth rate. the output gap, which was substantially negative before the economic recovery started, recovered gradually to its past average. however, the cpi inflation rate remained near zero until around the middle of last year. there are two factors contributing to this lack of response of prices to a change in output gap. first, competition has intensified against the backdrop of globalization and deregulation. emerging economies, in the process of being incorporated in the global economy, have established themselves as global production sites with abundant and inexpensive labor. imports from these emerging economies have increased dramatically and the competitive threat from these imports prevented domestic producers from increasing their product prices when demand recovered. deregulation is another factor increasing competition, which is exemplified in the deregulation of large - scale retail stores. competition has intensified among retailers, large or small, and they have tried to avoid charging higher prices even if demand picked up, fearing that they might lose their customers to their competitors. second, wage increases have remained subdued throughout this period. competitive pressures from emerging economies of inexpensive labor have become a major factor restricting increases in wages. moreover, there are other factors specific to japan. an increase in the number of non - regular employees with low wages is one. another factor is the mass retirement of baby - boomers who were paid higher wages than young workers, and the resulting replacement of high - wage old workers by low - wage young ones. furthermore, severe fiscal conditions forced central as well as local governments to restrain wages of government and related