Central Bank forecasts 1.4% growth in 2013

In its first quarterly report for 2013 the central Bank of Malta projected an increase in disposable income and consumption, however it also predicted that investment in the property market would remain weak in 2013.

The construction of the Delimara gad-fired power plant and the reduction in energy tariffs planned for next year also play a pivotal role in reducing inflation and boosting consumption.

According to the Central Bank of Malta's latest projections for the Maltese economy, the growth rate in 2013 should gain momentum after the slowdown recorded in 2012.

The forecast for real gross domestic product (GDP) growth in 2013 remained unchanged from the CBM's previous predictions, which was presented in the Annual Report 2012, but is slightly higher for 2014.

The real GDP growth is expected to accelerate from 0.8% in 2012 to 1.4% in 2013 and to 1.9% in 2014

The growth rate is expected to be driven by domestic demand, particularly private consumption, which should recover this year and pick up further in 2014.

The CBM said government investment is projected to boost overall economic activity in 2013 and, particularly, in 2014, as the construction of a new gas-fired plant and liquid gas facilities in Delimara gathers pace.

Net exports are expected to expand in 2013, albeit at a more moderate pace than in 2012. However, exports are set to drop in 2014, with the contribution to GDP growth turning negative under the impact of higher imports related to the projected increase in domestic demand, notably investment.

After having dropped by 0.6% in 2012, private consumption is set to grow by 1.0% in 2013 and by 2.1% in 2014.

The recovery is expected to be driven by growth in real disposable income, partly under the impact of the gradual reduction in the income tax rate paid by households in selected income tax bands.

The general election and the approval of the 2013 Budget earlier this year should also provide further stimulus to private consumption in the near term, the CBM noted.

Government consumption is also expected to increase in 2013 and 2014. However, its contribution to growth is below 2012 levels as the government is set to restraint its expenditure in order to bring the fiscal deficit-to-GDP ratio below the EU's 3.0% target.

Moreover, part of the rise in government consumption in 2012 reflected one off increases in the wage bill following the conclusion of a number of collective agreements in the general government sector during the year.

After having contracted in 2012, investment is expected to recover in 2013 and to increase more strongly in the following year.

The bank's projections take into account the planned construction of new gas storage facilities, a new gas-fired plant and the eventual conversion of existing power facilities to run on gas.

"With this project assumed to begin late in 2013, its impact also largely explains why the contribution of domestic demand to GDP growth in 2014 is higher than in the projections presented in the Annual Report 2012," the CBM report said.

The bank's investment projections also highlight two other projects. In particular, the bank expects the Valletta City Gate project to be completed in 2013, whereas capital expenditure related to the electricity connection between Malta and Sicily is assumed to peak during the year.

"In contrast, investment in dwellings is expected to remain weak, while investment on machinery & equipment, after excluding the specific projects mentioned above, is set to contract further. IT-related spending also supports overall investment in 2013, reflecting the continued expansion of the services sector," the report said.

However, in 2014, investment is set to grow strongly, mainly because of the new initiatives in the energy sector, but also in view of the bank's expectation of a gradual recovery in underlying investment in equipment & machinery and in construction.

This year, inbound tourism is set to provide continued support to total exports, partly due to an increase in the number of airline routes serving the country and continuing instability in a number of competing destinations.

In 2014, however, overall export growth should accelerate in line with the expected improvement in the economies of Malta's main trading partners.

Imports too are set to decelerate in 2013, the report noted. "Although the recovery in private consumption is expected to support imports of consumer goods, the projected deceleration in exports dampens the expansion of other import categories."

In 2014 import growth is expected to pick up in line with the anticipated recovery in both domestic demand and exports. The profile for investment in the energy sector also has a specific bearing on imports that year.

The unemployment rate is also expected to remain unchanged at 6.5% in 2013, and to ease slightly to 6.4% in the following year.

Inflation

Following a strong increase in inflation in 2012, which was largely driven by movements in accommodation prices and, to a lesser extent, food prices and prices of non-energy industrial goods, the inflation rate based on the Harmonised Index of Consumer Prices is set to moderate to 1.4% in 2013 and to remain at that level in 2014.

The projections for inflation for 2013 and 2014 are driven by technical assumptions, particularly the declining price of Brent crude oil.

Moreover, in 2013, tourist accommodation prices are set to go down sharply following the very strong increase last year. These factors, and the impact of falling oil prices on transport costs, should lead to an easing in energy and service inflation in 2013.

The projection for inflation in 2014 also assumes a drop in electricity and water tariffs, in line with the Government's electoral commitments. This further drop in energy prices would offset a pick-up in the price of services, the CBM said.

Fiscal deficit expected to narrow slightly

The general government deficit-to-GDP ratio widened to 3.3%, from 2.8% in 2011. It is expected to narrow to close to 3.0% in both 2013 and 2014, as revenue is projected to grow slightly faster than expenditure.

The recovery of VAT arrears, growth in corporate tax revenue and Budget 2013 increase in excise duties contribute to revenue growth over the projection horizon.

However, the impact of these factors is in part offset by the absence of one-off items that pushed up revenue in 2012 and by the revisions to income tax bands announced in the Budget.

At the same time, the fiscal projections assume restrained growth in selected items of current expenditure, particularly intermediate consumption and compensation of employees. 

Expenditure on pensions is also set to grow moderately in 2013, as the pension reform postpones retirement of certain cohorts to 2014. Growth in compensation of employees is expected to slow down this year, after having been boosted by the signing of a number of collective wage agreements in 2012.

It should slow further in 2014 on the assumption that retiring employees in the government sector are not fully replaced. Intermediate consumption embeds an element of restraint, in line with the Government's commitment to contain recurrent expenditure.

The general government debt-to-GDP ratio is expected to increase over the projection horizon, reaching close to 74% in 2014.