Malta: Current account and budget balance surpluses cement

Real GDP growth is projected to remain robust, albeit moderating from the peak in 2014 and 2015. The positive output gap is set to gradually close amid record-low unemployment and moderate wage growth. The current account and the budget balances are set to remain in surplus.

Growth momentum remains strong

Real GDP grew strongly by 6.3% in the first half of 2017. External demand looks set to be the main driver of growth in 2017 with domestic demand playing a secondary role due to a strong contraction of investment (reflecting a high base in 2016). Real GDP growth is forecast to reach 5.6% for 2017 as a whole, marginally higher than the rate recorded in 2016. Strong export growth, particularly in services, and a fall in imports related to the contraction in investment is pushing up the current account surplus, which is forecast to approach 10% of GDP in 2017.

Private consumption drives growth in the near term

Real GDP growth is projected to slow somewhat in 2018 to 4.9%. Private consumption is expected to become the main driver of growth on the back of an increasing population and growing disposable income. In addition, improved consumer confidence and consumption is expected to result in a somewhat lower household saving rate. Investment is forecast to recover, led by the residential construction sector which is expected to continue growing strongly in 2018. Exports are forecast to continue rising, in line with growing demand among Malta’s main trading partners, resulting in a further increase in the current account surplus.

In 2019, real GDP growth is projected to slow down to 4.1%, below potential output. Private consumption is projected to remain the main driver of growth, while all demand components are forecast to contribute positively. Investment is expected to increase modestly, mainly on the back of the construction sector.

Price pressures moderate remain

Despite a very low unemployment rate and increasing skill shortages, wage growth was moderate in the first half of 2017. Strong increases in labour supply, also on the back of inflows of foreign workers, served to dampen the upward pressure on wages. As the increase in labour supply moderates over the forecast horizon, wage growth is forecast to improve. Despite concomitant gains in productivity, unit labour costs are projected to rise faster than the euro-area average in 2018 and 2019.

Relatively moderate increases in regulated fuel prices have contained overall HICP inflation, which is forecast to average 1.3% in 2017, marginally below the euro-area average. Thereafter inflation is projected to strengthen to 1.8% in 2019. Higher price growth is expected to come mainly from the services component, which is projected to rise in line with growing disposable incomes.

Risks to the macroeconomic projections are linked primarily to the outlook for investment, private consumption and net exports. A faster realisation of planned infrastructure projects could boost growth in the near term. At the same time, more conservative savings behaviour by households could limit consumption, thus dampening real GDP growth. A favourable relocation of financial services operators linked to the process of the UK leaving the EU could also affect GDP growth, particularly in 2019. Finally, in view of Malta’s open- ness to trade (nominal exports and imports combined to reach 270% of GDP in 2016) any volatility in Malta’s main exporting sectors would have a disproportionately large impact on real GDP growth.

Government balance remain in surplus to

In 2017, the government balance is projected to remain in surplus, at 0.9% of GDP. Revenue growth is supported by the favourable macroeconomic and labour market conditions, high corporate profits, consumer demand and the proceeds from Malta’s citizenship scheme. Overall, total revenue is expected to increase by less than nominal GDP. Current expenditure is projected to increase on the back of a growing public wage bill and intermediate consumption, only partly mitigated by a decrease in interest expenditure. Capital expenditure, net of EU funds, is projected to decrease only marginally.

In 2018, after incorporating the expected impact of the measures introduced with the 2018 Budget, the fiscal surplus is expected to decline to 0.5% of GDP. In line with robust real GDP growth and a strong labour market, and despite the reduction in taxation worth 0.2% of GDP, tax revenues are expected to continue growing. Yet, following expected lower proceeds from the citizenship scheme, overall current revenue growth is expected to slow down. In spite of increases in social spending related to the budget measures (among which is an increase in pensions by €2 per week), current expenditure growth is projected to weaken and interest expenditure is set to marginally decrease. Net public investment is forecast to remain stable, as the implementation of investment projects co-financed by the EU picks up. In 2019, under a no-policy-change assumption, the fiscal surplus is expected to remain stable at 0.5% of GDP.

The structural balance as a percentage of GDP is estimated to be broadly balanced in 2018. In 2019 it is estimated to increase further to ½% of GDP thanks to a rapid closure of the positive output gap. The government debt-to-GDP ratio, which fell below the 60% threshold in 2016, is forecast to decline further to 48.8% in 2019.

Risks to the fiscal outlook are balanced as higher current expenditure and related slippages in budgetary execution could be compensated by higher proceeds from the citizenship programme.