Malta registers lowest inflation as EU hit by multiple headwinds

Economic growth is expected to pick up in 2022 as demand at home recovers with the implmentation of the COVID recovery plan, according to the Winter Forecast by the European Commission released today.

Real GDP is forecast to grow by 6.0% in 2022 and 5.0% in 2023, with Malta expected to reach pre-pandemic levels of economic activity around mid-2022.

But the European Commission said a limited downside risk remains related to possible consequences of the June 2021 decision of the Financial Action Task Force to add Malta to the list of jurisdictions under increased monitoring.

Still, relative to the EU average, inflation in Malta has increased only moderately in 2021, with the authorities committed to limit energy prices growth in 2022.

But the increase in food, transport and imported goods prices and a gradual recovery in the tourism and hospitality sectors are set to drive up price pressures in 2022 with a 2.1% rate, and then falling to 1.9% in 2023.

“Malta has the lowest rate of inflation for an EU country,” the Office of the Prime Minister said in a statement. “On average, EU inflation is expected to rise to 3.9% - double Malta’s.”

Real GDP growth rebounded strongly to 5.9% in 2021 after the improvement of the public health situation in Malta allowed for a significant relaxation of restriction measures.

“Improved business and consumer sentiment, as well as a recovery in tourism supported the economy,” the European Commission said.

In the rest of the EU, growth continues to be shaped by the pandemic, with many EU countries under pressure from a combination of increased strain on healthcare systems and staff shortages due to illness, precautionary quarantines or care duties.

Logistic and supply bottlenecks, including shortages of semiconductors and some metal commodities, are also set to keep weighing on production, at least throughout the first half of the year.

Last but not least, energy prices are now expected to remain elevated for longer than expected in the Autumn Forecast, thereby exerting a more protracted drag on the economy and higher inflationary pressures.

After reaching a record rate of 4.6% in the fourth quarter of last year, inflation in the euro area is projected to peak at 4.8% in the first quarter of 2022 and remain above 3% until the third quarter of the year. As the pressures from supply constraints and high energy prices fade, inflation is expected to decline to 2.1% in the final quarter of the year, before moving below the European Central Bank's 2% target throughout 2023.

Overall, inflation in the euro area is forecast to increase from 2.6% in 2021 (2.9% in the EU) to 3.5% (3.9% EU) in 2022, before declining to 1.7% (1.9% EU) in 2023.

Paolo Gentiloni, Commissioner for Economy said: “Multiple headwinds have chilled Europe's economy this winter: the swift spread of Omicron, a further rise in inflation driven by soaring energy prices and persistent supply-chain disruptions. With these headwinds expected to fade progressively, we project growth to pick up speed again already this spring. Price pressures are likely to remain strong until the summer, after which inflation is projected to decline as growth in energy prices moderates and supply bottlenecks ease. However, uncertainty and risks remain high.”