Moderate but robust economic growth for Malta in 2017, EU forecast

The European Commission has forecast that Malta’s real GDP growth will slow to 4.1% towards the end of the year, and grow by a moderate but robust 3.5% in 2017.

This follows last year’s economic growth of 6.3%, mainly driven by large-scale energy projects.

In its spring economic forecast, the EC said that deceleration is set to come on the back of investment, that is seen stabilizing from a high base in 2015. The large energy projects – namely the LNG power station – that flattered investment in 2015 are expected to reach completion, while the expansion in residential construction is expected to moderate.

Household consumption is also projected to slightly decelerate but remain robust towards the end of the year, reflecting strong employment growth and rising real wages. These developments will be partially offset  by stronger net exports, reflecting weaker demand for imports as well as a pick-in demand from trading partners.

Household consumption is expected to decelerate further in 2017, reflecting normalisation of the saving rate, while job creation and real wages are forecast to rise at robust rates.

Government consumption is projected to increase strongly and contribute significantly to growth. Investment is also projected to expand moderately on the back of large healthcare and education projects.

Growth could be stronger if the reduction in the household saving rate, supported by expected gains in disposable income and population growth, carries over for the rest of the forecast horizons. Downside risks are mainly linked to slippages in the investment schedule for large projects.

Inflation is projected to increase from 1.2% in 2015 to 1.4% to 2.2% in 2017. Acceleration is expected to come mainly from a gradual recovery in energy prices, following the electricity tariff cuts in previous years. Services prices are forecast to pick up more strongly in 2017, contributing to overall price inflation. Core inflation is projected to outpace the euro area average and to come in at 1.7% and 2.2% in 2016 and 2017 respectively.

Further deficit, debt ratio reductions expected

The European Commission projects the deficit to further decrease to 0.9% of the GDP in 2016 and 0.8% in 2017, down from 1.5% last year and 2% in 2014.

Current revenue is expected to increase this year as a result of higher excise duties and higher proceeds from the IIP citizenship programme – which are forecast to be only partly offset by the lowering in income tax for low-income earners and the phasing out of the eco-contribution. Current expenditure is expected to continue growing due to social measures, such as upward adjustments of the minimum contributory pension and the partial funding of the cost of home care for the elderly.

Public investment is expected to decline thanks to the phasing out of the capital injection to Air Malta, while the sharp decline in the absorption of EU funds due to the start of a new programming period should be partially compensated for by a higher reliance on national funds.

The general government debt is projected to decrease from 63.9% of GDP in 2015, to 60.9% in 2016 to 58.3% in 2017.