EU sees positive future for Malta's economy

14th February 2017 • News

Growth is expected to remain well above the EU average


Malta’s economic growth has settled down from the exceptional levels of 2014 and 2015 but is forecast to remain well above the EU average, the European Commission said in its winter forecasts today.


It said unemployment is set to remain at record lows while productivity gains contain unit labour costs and preserve competitiveness.


The budget deficit is only expected to improve marginally, however, as growing tax revenues are largely offset by rising expenditure.


The economic expansion is forecast to continue at a broadly unchanged pace in 2017 and 2018.


Private consumption is projected to continue growing robustly, supported by favourable labour market developments. Fiscal policy is set to remain accommodative, while improving financing conditions are set to contribute to the recovery in investment.


The current-account is forecast to stabilise at a surplus of over 5% of GDP.


Given Malta’s high trade openness, shocks to global trade could have a disproportionate impact on the domestic economy, the commission said.

The successful launching of the Malta Development Bank could lead to more dynamic investment in the medium term.


Meanwhile, effective implementation of ongoing structural reforms could boost domestic demand and further support growth prospects going forward.


Net job creation in 2016 is expected to have been robust thanks at least in part to the implementation of activation policies by the government. It is forecast to have outpaced the expansion of the labour force, sending the unemployment rate to below 5%.


Unemployment is set to remain broadly unchanged over the forecast horizon, close to the structural rate. Skills shortages are expected to put pressure on wage growth.


With productivity rising at the same time, however, unit labour cost increases are projected to remain contained.


Consumer price inflation moderated in 2016 in particular due to prices of recreation and cultural services. It is projected to pick up moderately over the forecast horizon but to remain below the long term average.
Budget deficit broadly stable over the forecast horizon

In 2016, the general government deficit is estimated to have decreased to 0.7% of GDP, from 1.4% in 2015. Current revenue is expected to have grown more than nominal GDP, due to the favourable macroeconomic environment as well as the proceeds from the citizenship programme and the rise in excise duties.


Current expenditure is expected to have continued growing, mainly driven by increases in public sector wages and intermediate consumption, which included costs associated with Malta’s presidency of the EU.


Despite the sharp decline in the absorption of EU funds, due to the beginning of a new programming period, and a lower capital injection into the national airline, net capital expenditure is expected to increase by 0.2 pps. of GDP.


In 2017, the deficit is expected to decline marginally to 0.6% of GDP.


Despite a boost to tax revenue by the introduction of revenue increasing measures in the 2017 budget, current revenue is expected to grow slower than nominal GDP due to lower proceeds from the citizenship scheme.


Current expenditure growth is also expected to moderate, mainly thanks to lower interest expenditure and a more moderate increase in social spending.


On the contrary, higher intermediate consumption and other current expenditure are set to boost the growth rate of the total current expenditure.


Net public investment is expected to decrease by 0.2 pps. of GDP due to greater implementation of investment projects co-financed by the EU.


In 2018, under a no-policy-change assumption, the deficit is expected to remain stable even as revenues linked to the citizenship programme continue to fall.


Potential expenditure overruns could come from a renewal of the public sector wage agreement.


The structural deficit is projected to be on a declining path and to improve by more than 2 pps. of GDP by 2018. From 60.8% in 2015, the debt-to-GDP ratio is projected to fall below 60% in 2016 and to reach 55.6% by 2018.




Government makes comparisons with last legislature


In a reaction, the government said this administration was wiping out the debt raised in three previous legislatures.


It noted that according to the EU’s projections, economic growth in Malta would be twice the eurozone average and the second highest in the eurozone.


Furthermore, unemployment had been reviewed downwards to 4.9%.


While at the end of the last legislature public debt was projected at 70% of GDP, it was now 55%, the lowest since 1998. Thus, in one legislature, the government would have wiped out the the debt made in the three last PN administrations.