European Commission forecasts economic growth to moderate

While Malta’s economic growth momentum is expected to remain solid, gross domestic product growth was yesterday forecast by the European Commission to moderate in 2019 and 2020 to 5.3% and 4.8%, respectively.

In its Summer Economic Forecast published yesterday, the European Commission said the expected slowdown is the result of private consumption growth gradually moderating, mirroring the pace of job creation.

Public expenditure, it said, is expected to increase faster than private consumption as the government makes use of the fiscal space it has accumulated over recent years.

Investment is expected to remain robust over the forecast horizon, supported by planned infrastructure and health projects.

Looking at the external sector, the Commission said import growth is set to pick up in parallel with investment growth, narrowing the large current account surplus.

After reaching 1.7% in 2018, inflation was subdued in the first months of 2019 before accelerating in April, driven by rising food prices.

Prices, the Commission said, are expected to further increase during the peak tourism season and then slightly decelerate, pushing headline inflation to 1.8% in 2019 and 1.9% in 2020.

Malta’s economy grew by 6.7% in 2018, making it the fifth year in a row in which real GDP has grown by over 5%. The structural shift towards a fast growing, internationally-oriented services sector is the main factor behind Malta’s recent economic success.

Domestic demand was the main growth driver in 2018, replacing net exports. In particular, strong employment growth boosted household disposable income, resulting in record-high private consumption. In the first quarter of 2019, domestic demand was underpinned by public consumption and investment, while private consumption growth eased slightly. At the same time, net exports declined as a result of strong import growth. Consumer confidence remained above its historical average, but overall sentiment began to deteriorate in March, particularly in the services sector.

Overall, the European economy is set for its seventh consecutive year of growth in 2019, with all Member States’ economies due to expand. Growth in the euro area was stronger than expected in the first quarter of the year due to a number of temporary factors such as mild winter conditions and a rebound in car sales. It also benefited from fiscal policy measures, which boosted household disposable income in several Member States. The nearterm outlook for the European economy, however, is clouded by external factors including global trade tensions and significant policy uncertainty. These have continued to weigh on confidence in the manufacturing sector, which is the most exposed to international trade, and are projected to weaken the growth outlook for the remainder of the year.

As a result, the forecast for euro area GDP growth in 2019 remains unchanged at 1.2%, while the forecast for 2020 has been lowered slightly to 1.4% following the more moderate pace expected in the rest of this year (spring forecast: 1.5%). The GDP forecast for the EU remains unchanged at 1.4% in 2019 and 1.6% in 2020.