EC’s winter forecast for Malta: ‘dynamic growth, low unemployment ahead’

The European Commission expects Malta’s economy to continue growing supported by an increased participation of the female workforce.

According to the European Commission’s winter forecast, Malta’s labour market is projected to continue to perform well as the employment dynamics are projected to continue to be driven by the improvements in the labour market activity of women.

Job creation is forecast to moderate somewhat compared to 2013-14 but to remain robust at around 2% per annum, while unemployment is seen to remain below 6%.

“The economy has maintained a healthy momentum. GDP growth is estimated to have reached 3.3% in 2014, a rate which should moderate somewhat by 2016 but remain strong relative to the rest of the euro area.

“The favourable macroeconomic climate should help the budget deficit fall below 2% of GDP.”

Real GDP growth rose in the third quarter of 2014 to reach 3.8% in annual terms, up from 3.4% in the second quarter. This reflected strong domestic demand, underpinned by dynamic investment in the energy sector and favourable labour market developments, and to a lesser extent exports, which, albeit weak, continue to outpace imports. Real GDP growth is estimated to have reached 3.3% in 2014 as a whole. Thereafter, it is expected to remain stable in 2015 and moderate somewhat by the end of the forecast horizon, reaching 2.9% in 2016.

Robust growth outlook

Private consumption is expected to continue showing strong growth in 2015-16, as disposable incomes rise due to falling energy prices and unemployment. Wage growth is seen to accelerate towards the end of the forecast horizon, thereby lending further support to aggregate household spending. Private investment is set to receive another large, albeit temporary, boost from the construction of a new power plant over the course of 2015. Energy-sector investment is also planned for 2016 although on a smaller scale – the existing power plant is planned to be converted to run on gas. The high base from 2015, however, is expected to result in noticeably weaker growth the following year. Despite the projected pick-up in import-intensive domestic demand, Malta’s current account balance is projected to remain in surplus, benefitting from a depreciation of the euro against other major currencies, which is seen to boost exports of the services sector and a moderate recovery in the electronics sector

Stronger recovery in the demand for credit, resulting from lower interest rates, could further boost the investment outlook thus representing an upside risk to the macroeconomic scenario. The ongoing energy reforms could improve the competitiveness of the corporate sector and lower costs for companies, which could result in higher- than-expected investment and exports.

Consumer inflation to pick up gradually

HICP inflation averaged 0.8% in 2014, down from 1% in 2013, largely due to the lowering of electricity tariffs in March. However, at 1.7%, core inflation, remained close to its long-term average. Both overall HICP and core inflation are projected to rise in 2015-16, on the back of rising services inflation as well as moderate increases in food and energy prices in 2016.

Budget deficit moderates

In 2014, the budget deficit is expected to have decreased to 2.3% of GDP, from 2.7% in 2013. The share of current primary expenditure relative to GDP is projected to have increased on the back of higher intermediate consumption as well as higher spending due to the temporary nationalisation of the public transport system, which led to a higher public sector wage bill and subsidies (the service was privatised again in 2015). Employment in the public sector has also increased due to new recruitments in the health and education sectors.

Net capital expenditure is set to have dropped due to a lower capital injection into Air Malta than the one in 2013. The favourable macroeconomic outlook as well as the revenue increasing measures included in the 2014 budget are expected to have supported current revenue, to an increase of 0.7 pp.

The government’s 2015 budget includes mostly revenue-increasing measures, such as increases in indirect taxation, fees and measures to fight tax evasion. On the expenditure side, the budget envisages several social measures (among which, child and in-work benefits for low income households and a compensation for those who do not qualify for income tax cuts) which are only partly compensated by some restraint on public wages.

As a whole, the current revenue ratio is projected to increase by 0.9 pp. of GDP, also on the back of higher-than-expected revenue from the International Investor Programme. Capital expenditure is set to increase due to a further capital injection into Air Malta of almost 0.5% of GDP. Overall, in 2015 the deficit is expected to narrow to 2.0% of GDP and to further decrease to 1.8% of GDP in 2016, on a no-policy-change assumption, also thanks to favourable nominal GDP growth.

After having worsened by more than 1 pp. of GDP in 2013, the structural deficit is estimated to have remained stable in 2014. It is projected to improve by 1⁄4 pp. of GDP both in 2015 and 2016.

The general government debt-to-GDP ratio increased to 69.5% in 2013, also on account of a debt-increasing stock-flow adjustment related to tax arrears from Enemalta (the public energy utility corporation). Also thanks to the expected repayment of these arrears, the debt ratio is projected to decrease to 68.6% of GDP in 2014 and to reach 66.8% of GDP by 2016.

Downside risks are linked to higher-than-expected subsidies to Malta’s new public transport service provider.