Subdued investment holds Malta’s growth
Economic growth in Malta continued to decelerate in 2012 with real GDP growth slowing down to 0.8%, from 1.7% in 2011 according to the Spring 2013 forecast published by the European Commission.
Net exports were the main driver, benefiting from strong export performance by the tourist and financial services, as well as declining imports of machinery and transport equipment. Domestic demand remained weak as household consumption growth turned negative again and gross fixed capital formation contracted further. In particular, private construction investment continued declining, falling below its 2004 value in nominal terms. Thus, it was only the significant increase in government consumption expenditure that supported domestic demand.
As domestic demand picks up, it is expected to underpin a gradual acceleration in real GDP growth to 1.4% in 2013 and 1.8% in 2014.
Household consumption is forecast to become the main contributor to economic growth over the forecast horizon, on the back of stable labour market conditions and improving consumer confidence following the parliamentary elections in March. Growth in fixed investment is projected to turn slightly positive in 2013 on the back of EU-funded projects, albeit subject to implementation risks, and the construction of the electricity interconnector with Sicily.
A mild acceleration in investment is forecast for 2014 as the approaching deadline for disbursements under the current programming period spurs the drawdown of EU funds. Still, overall fixed capital formation is expected to remain subdued, at around 15% of GDP over the forecast horizon, well below its pre-crisis peak of over 21%, and directed mainly towards replacing existing capacities rather than developing new ones. Government consumption is expected to continue to contribute positively to economic growth, albeit less so than in the pre-election year 2012, reflecting the need for fiscal consolidation. Despite expanding external demand, the pick-up in the import-intensive domestic demand over the forecast horizon will reflect in a declining contribution of net exports to economic growth.
Employment and wages continue to grow, while inflation moderates Job creation is expected to remain strong in 2013-14, with a projected annual rate of increase of around 2%. Employment growth is expected to come mainly from the services sector, underpinned by increasing female labour market participation, while unemployment is projected to moderate gradually to 6.1% in 2014.
After increasing sharply in 2012, partly pushed by indexation to high inflation, wage growth is projected to moderate, but labour shortages in some high growth sectors will continue to put upward pressure on wages. Restrained average wage growth will result in moderating unit labour costs increases over the forecast horizon. Still, unit labour costs are forecast to grow faster than in the euro area due to stagnating productivity.
After surprising on the upside in 2012, HICP inflation is expected to decelerate significantly in 2013 in line with the projected trends in international commodity markets. Price pressures in all components of HICP inflation are expected to subside as the economy continues to operate below its potential. All-items HICP inflation is projected to remain below 2% also in 2014, assuming that utility tariffs remain unchanged. The government's electoral commitment to lower tariffs significantly in 2014 represents a downside risk to these projections.
The general government deficit increased by 0.5% in 2012, reaching 3.3% of GDP. The increase was due to accelerating intermediate consumption, higher social transfers and the rise in compensation of employees in the public sector. The latter occurred on account of the renewal of collective agreements in a number of sectors, including health and education, while the government was committed to restraining hiring. In spite of dynamic public investment and higher subsidies to investment, including the equity injection into Air Malta, net capital expenditure as a share of GDP increased only marginally, as a result of higher capital transfers and negative capital asset sales. Total current revenues increased mainly on the back of dynamic taxes on income and wealth and social contributions, while subdued private consumption implied a moderate growth in indirect taxation revenue.
The approved 2013 budget appears to be expansionary. As a consequence, the deficit in 2013 is expected to widen to 3.7% of GDP. Total current primary expenditure is forecast to increase marginally by 0.1 pp. of GDP, as the increase in intermediate consumption is offset by less dynamic social transfers due to the impact of the 2006 pension reform.
On the capital side, net expenditure, comprising the planned additional equity injection into Air Malta (0.6% of GDP), is expected to stabilise. The increase in tax revenue related to the pick-up in economic activity only partly compensates for the disappearance of the one-off revenues registered in 2012. In addition, income taxes are projected to decelerate on the back of measures to gradually reduce the overall income tax burden in 2013-15. As a result, current revenues are projected to decline marginally. In 2014, the deficit is projected to improve slightly, reaching 3.6% of GDP mainly due to improved labour market conditions.
The debt-to-GDP ratio is projected to continue increasing over the forecast horizon, as the primary deficit is expected to continue expanding. The main downside risk to this debt outlook is related to the financial situation of Enemalta, which could entail additional subsidies. After increasing by 0.5% of GDP in 2012, the structural deficit is expected to improve mildly by 0.25% of GDP in 2013, on account of one-off measures. Under the usual no-policy-change assumption, the structural deficit improves further, albeit only slightly, in 2014.