European Commission: Malta’s deficit expected to widen to 3.5% of GDP

Economic growth is expected to remain subdued in 2012 before the economy starts gaining speed in 2013, the European Commission said today in its autumn forecast for the Maltese economy.

In its forecast, released after Commissioner Olli Rehn said Malta and four other member states had to speed up their deficit cutting measures, the EC said Malta’s deficit was expected to widen to 3.5% of gross domestic product in 2012 and 3.6% in 2013.

Brussels noted that economic growth in the first six months of 2011 was driven by exports growth, although a recent report by the Economist Intelligence Unit raised questions on the way fuel exports had outstripped fuel imports: something the National Statistics Office this week revealed was due to the lack of data being registered by fuel traders.

The EC said weaker economic activity was set to continue in 2012, bringing real GDP growth down to 1.3% before picking up to 2% in 2013.

Another dampener is the subdued investment by private business due to strict lending conditions by banks. The EC says financial markets will stabilised in 2012, but if conditions deteriorate it could mean tighter access to banking credit:

“Higher rates could further increase credit risk, which already stands relatively high with a non-performing loan ration of 7.3% for the domestically-oriented banks in the second quarter of 2011.

“In addition, high exposure to the construction sector leaves banks vulnerable to further adjustment in real estate prices.”

The silver lining in the EC’s forecast is job creation, where strong wage growth will support private consumption, and will also provide enough place for increased integration of more women in the labour force: “The projected pace of job creation is sufficiently strong to absorb them and produce a slight decrease in the unemployment rate.”

The forecast also says energy inflation will slow down due to a drop in oil prices in the second half of 2011. Still, energy inflation will remain relatively high in 2012 as the decline in oil prices is offset by higher electricity rates.

In 2010 capital spending remained flat, reflecting weak absorption of EU funds, the postponement of some projects and one-off sales of shipyards assets. “In spite of some revenue-enhancing measures (including a tax amnesty), tax proceeds grew less than GDP as the rebound in economic activity was driven by relatively tax-poor components, mainly exports,” the EC said.

The deficit should narrow to 3% of GDP this year, when the primary balance is projected to be in surplus for the first time since 2007. Around two-thirds of the deficit reduction between 2010 and 2011 is related to the expiry of some temporary measures supporting the economy that were adopted with the 2010 budget.