European Commission’s Spring 2018 Economic Forecast

Sustained economic growth

Economic growth is projected to moderate but to remain vigorous over the forecast horizon. Malta’s economy is among the fastest growing economies in the EU, with record-low unemployment and moderate wage growth. The current account and the budget balances are set to remain in surplus.

Strong economic growth continues

The robust growth momentum enjoyed by Malta in recent years continued in 2017. Real GDP grew by 6.6% on the back of a significant current account surplus. Growth was predominantly driven by the services sector, which helped to fuel export growth and strengthen the external position. With imports contracting at the same time, net exports accounted for most of the increase in real GDP growth. Private consumption growth remained steady and gross fixed capital formation declined, largely because of exceptional investments in the aviation and energy sectors in previous years.

Following the buoyant performance of 2017, growth is set to remain strong but to ease somewhat over the forecast horizon. Domestic demand is expected to become the main driver of growth in 2018, underpinned by the expansion in private consumption and the recovery in investment. Real GDP growth is forecast to average 5.8% for 2018 as a whole, in a context of favourable labour market conditions and high consumer confidence. The strong performance of the services sector, particularly in areas such as tourism, remote gaming and professional services, is expected to sustain the sizeable current account surplus.

In 2019, investment is expected to pick up further, supported by several projects in the health, technology and telecommunication sectors. With domestic demand projected to remain the main driver of growth and a modest contribution from net exports, real GDP is set to increase by 5.1%.

Sustained employment creation and modest price increases

Labour supply continued to increase thanks to the inflows of foreign workers and the rising participation of women in the labour market. Over the forecast horizon, strong economic momentum should further support employment creation, while the unemployment rate is forecast to remain at the record-low rate of 4%. The increase in the labour supply helped to keep wage pressures contained, resulting in stable unit labour costs in 2017. In the near term, higher expected growth in compensation per employees is projected to result in increases of unit labour costs by respectively 1.5% and 1.6% in 2018 and 2019, above the euro area average.

Inflation pressures remained contained as a result of weak wage dynamics and the relatively moderate increase in regulated fuel prices, contributed to contain inflationary pressures. Headline annual HICP inflation is forecast to gradually pick up over the forecast horizon to reach 1.8% in 2019, driven by price pressures in the services component.

Broadly balanced risk profile

Risks to the macroeconomic outlook appear broadly balanced. Upside risks mainly pertain to lower increase in imports and higher investment growth, including from the activities of the Malta Development Bank. In addition, the services sector could benefit from opportunities arising in new areas such as blockchain and cryptocurrencies exchanges. Among downside risks, a normalisation in market rates and yields could put downward pressure on house prices and negatively affect the construction sector. A possible deterioration in trade opportunities, resulting from emerging global geo-political tensions or trade frictions, would also constitute a significant risk for Malta’s small and open economy.

Government remain firm balance to

In 2017, the fiscal surplus increased substantially, to 3.9% of GDP. This much better-thanexpected outcome is explained by the high growth rate of current revenue, including both tax revenue and the proceeds from Malta’s citizenship scheme (2.6% of GDP). Current expenditure grew faster than in the previous year. Intermediate consumption, public wages and social security expenditure were particularly dynamic. Apart from the costs associated with Malta’s presidency of the EU, intermediate consumption was also driven by spending in the health and education sectors and by other entities in the central government sector. Despite an improvement in the absorption of EU funds, net capital expenditure decreased by 0.3 pps. of GDP.

In 2018, after incorporating the expected impact of the expansionary measures introduced with the 2018 Budget, the fiscal surplus is expected to decline to 1.1% of GDP. In line with robust real GDP growth and a strong labour market, and despite a reduction in government revenue of 0.2% of GDP, tax revenues are expected to continue growing. However, following much lower budgetary impact from the citizenship scheme (at 0.9% of GDP), overall current revenue growth is expected to slow down substantially. Current expenditure growth is projected to remain strong in all its components, except interest expenditure which is set to decrease. Following a pick-up in the implementation of investment projects co-financed by the EU and a capital transfer to Air Malta of 0.5% of GDP related to the transfer of landing rights, net capital expenditure is forecast to recover. In 2019, under a no-policy-change assumption, the fiscal surplus is expected to improve marginally to 1.3% of GDP.

The structural balance is estimated to have improved significantly in 2017 to a surplus of 3½% of GDP. In 2018 it is estimated to decline to about ½% of GDP and to improve to around 1% of GDP in 2019. The government debt-toGDP ratio, which fell to 50.8% in 2017, is forecast to decline further to 43.4% by 2019.