Malta Fiscal Advisory Council publishes its assessment of the Government’s macroeconomic forecasts

On 16 October, the Malta Fiscal Advisory Council presented its assessment of the official macroeconomic forecasts which underpin the Draft Budgetary Plan for 2018. The Council considers the updated forecasts for real GDP growth of 5.9% for 2017 and 5.6% for 2018 to lie within its endorsable range. These growth rates are judged to be compatible with the assumptions employed as well as the economic relationships characterising the Maltese economy.

The Council’s endorsement is mandated by European regulations, which are transposed into Maltese legislation through the Fiscal Responsibility Act. The endorsement of the macroeconomic forecasts ensures that the economic scenario against which the revenue and expenditure forecasts presented in the Budget have been prepared, is indeed realistic, when considering the information available to date.

The government’s latest outlook for real GDP growth for 2017 and 2018 puts forward a more positive scenario compared to the previous forecasts published in the Update of Stability Programme in May 2017, when real GDP had been projected to expand by 4.3% and 3.7% in 2017 and 2018, respectively. The Council understands that the overall more positive growth outlook is shaped by the actual economic developments recorded during the first half of 2017, when real GDP grew by 6.4%.

The latest official forecasts indicate that the main drivers of economic growth are expected to vary across 2017 and 2018. The external sector is likely to be the exclusive source of growth in 2017 as exports are expected to rise whereas imports decline. On the other hand, final domestic demand, on aggregate, is not forecast to contribute to growth in 2017 as the impact of the expected higher private consumption growth is expected to be neutralised by the anticipated contraction in investment.

For 2018, the external sector is again expected to be a source of growth, but its contribution is expected to be smaller, with final domestic demand expected to play the larger role, particularly in view of the anticipated recovery in investment spending, which will be reinforced by strong growth in private and government consumption expenditure.

The Council’s view is that the forecasted acceleration in private consumption growth, from 3.0% in 2016, to slightly above 4.0%, in both 2017 and 2018, is compatible with the ongoing supportive economic conditions. Indeed, the outlook for the labour market, in terms of employment and wage growth remains buoyant and in line with the developments observed in recent years.

On the other hand, the forecasts for gross fixed capital formation appear to give rise to an element of uncertainty, when considering the highly volatile patterns exhibited by this component in recent years. To some extent, this uncertainty transfers unto the import growth forecasts, owing to the high import content of investment spending in Malta.

These considerations create some uncertainty on the relative contribution to growth stemming from final domestic demand and the net exports component in each of the forecast years. Additional elements of risk stem from possible unanticipated international developments which could impact specific export-oriented service sectors, given Malta’s openness and small size.

Despite these elements of uncertainty, the Fiscal Council views the balance of risks to real GDP growth over both 2017 and 2018 as broadly neutral. Possible downside risks appear to be compensated for by the general level of prudence embodied in the official forecasts. The full report, entitled “Assessment of the Macroeconomic Forecasts – Draft Budgetary Plan 2018”, is available on the website of the MFAC http://www.mfac.org.mt.