Updated | Malta wages rise slowly despite skills shortages and low unemployment

Real GDP growth in Malta is forecast to reach 5.6% for all of 2017, slightly higher than that of 2016, according to the European Commission’s Autumn forecast.

The main factor behind this year’s growth is set to be external demand, with domestic demand coming in second because of a significant contraction in investment.

The current account surplus is forecast to be close to 10% of GDP for 2017, pushed by strong growth in exports, especially service, and a drop in imports related to the contraction in investment.

Come 2018, there is expected to be a slow-down to 4.9% in real GDP growth, with private consumption expected to become the principle factor behind the growth, based on an increasing population  and higher disposable income.

Household savings is predicted to be lower than in 2017, due to increased consumer confidence and consumption.

Investment is expected to recover in 2018, pushed by residential construction, which should continue growing strongly.

Exports should also continue to rise, due to increased demand from Malta’s trade partners.

By 2019, real GDP growth is expected to slow down to 4.1%, with private consumption remaining the main growth driver. Investment is predicted to increase slightly, mostly due to the construction sector.

Moderate wage growth in 2017

Wage growth grew moderately for the first half of 2017, even though the unemployment rate was very low, and skill shortages increased.

One reason behind this was the increase in the labour supply, including through inflows of foreign workers.

Once the labour supply increase becomes more moderate, wage growth is forecast to improve.

Unit labour costs are predicted to rise faster than euro-area average for 2018 and 2019.

Inflation should average around 1.3% for 2017, slightly below EU-average, contained by a relatively small increase in regulated fuel prices. It is however expected to grow to 1.8% in 2019, with higher prices in the services projected to be behind this.

Real GDP

Malta’s treal GDP growth could be pushed by the faster completion of infrastructure projects, as well as by the potential relocation of financial services operators to Malta due to Brexit.

More conservative household saving behaviour, could, on the other hand, slow down consumption and limit growth in real GDP.

Since Malta is very open to trade, with nominal exports and imports combined reaching 270% of GDP in 2016, any alternation in Malta’s principe exporting sectors would have a disproportionately significant effect on real GDP growth.

Government balance set to remain in surplus

The government 2017 balance is expected to remain in surplus at 0.9% of GDP.

The main reasons for this are positive macroeconomic and labour market conditions, high consumer demand and corporate profits, and money earned through Malta’s citizenship scheme.

The surplus is expected to decline to 0.5% in 2018, once the 2018 budget measures are introduced, but should remain stable at the same figure in 2019, under a no-policy-change assumption.

Tax revenues in 2018 are predicted to continue growing due strong to real GDP growth, despite a reduction in taxation.

However, overall current revenue growth is predicted to slow down next year, due to expected lower income from the citizenship scheme.

Moreover, in spite of more social spending due this year’s budgetary measures, such as an increase in pensions, current expenditure growth is expected to weaken in 2018.

Net government investment is forecast to remain stable, as more EU co-funded projects are implemented.

Reaction of finance minister

In a reaction to the report, finance minister Edward Scicluna said the Commission’s Autumn forecast highlighted Malta’s surplus, and the fact that the country was exporting more than it was importing - something which is a characteristic of economically strong countries, such as Germany and Japan.

Moreover, he said, the report showed the surplus was sustainable and would continue into the future.

He added that the forecast mentioned inflation as a future risk, but that this was low and would remain so.

The possibility of wages increasing to a more significant degree than they have till now depended on whether the influx of foreign workers was kept up, he maintained.

Malta was open to welcoming companies which were re-locating or co-locating following the UK’s process to leave the EU, he said, if this was in both parties’ best interest.