The unexpected stalling of economic recovery across the European Union in late 2011 yesterday prompted the European Commission to slash 2012 growth forecasts for the eurozone and for Malta in its Autumn Spring Economic Forecast.
Malta’s economic growth forecast for this year was revised down from the 1.3% forecast back in November to 1%, while the eurozone’s forecast growth was cut by 0.3% to -0.3%. The EU’s growth forecast, meanwhile, remained at 0%.
In its report, the Commission specified that Malta’s downward revision “primarily reflects the impact of the projected further slowdown in the euro area”, but warns matters could worsen much more should Malta’s “very large banking system” begin to suffer from domestic credit exposure or should tourism figures begin to diminish.
The Commission warned in its report: “The forecast is subject to downside risks emanating from possible negative feedback loops between the very large banking system and the real economy in case of a further worsening of the quality of the credit portfolio, especially in view of the already elevated share of non-performing loans and high exposure to the real estate sector.
“In addition, the hit through the trade channel could be larger than anticipated, for instance because of the heavy reliance of the tourist sector on the euro-area market.”
In terms of the local 2012 outlook, the Commission yesterday described it as “relatively subdued”.
The latest consumer confidence indicators for Malta suggest that private consumption is to remain weak. “Households’ disposable income is expected to be squeezed by a significant deterioration in labour market conditions after the very strong employment gains recorded in 2011, while average wage growth is foreseen to remain below HICP inflation,” the Commission said in yesterday’s forecast document.
“Uncertainties about the domestic and international economic environment, coupled with cautious lending behaviour by banks, are likely to continue to dampen business investment, which is likely to contract for a second consecutive year.”
As such, domestic demand over the coming year is expected to continue to contribute only “very modestly” towards real GDP growth.
On the other hand, exports are once again expected to be the main contributor to growth in 2012, but they will do so less significantly so they had in 2011.
“Malta’s exports, in particular exports of goods, benefit from a relatively high share of trade with emerging markets but are nonetheless affected by the projected further slowdown of economic activity in the euro area compared to the autumn forecast, which would have a negative impact – especially on tourism exports,” the Commission said.
But Malta’s exports are still projected to continue to outpace the expansion of imports, which, the Commission said, have been restrained by the weakness of highly import-intensive domestic demand.
Maltese energy prices to ‘decelerate significantly’
Malta’s energy inflation is expected to “decelerate significantly” this year, according to the Commission, given more moderate assumed growth in oil prices compared to 2011, coupled with the government’s decision to keep utility tariffs unchanged for a second consecutive year.
Overall HICP inflation in 2012 is projected at 2.1 % , slightly lower than in 2011 and in line with the euro area average.
The Maltese economy had “rebounded relatively strongly” after a mild contraction in real GDP in 2009, and the positive momentum was carried into 2011 as well, the Commission observed.
“Buoyant private consumption, underpinned by healthy job creation and wage growth, as well as a strong performance by the tourist sector, were the main factors behind real GDP growth in the first half of 2011 and more than compensated for the relatively surprising weakness of business investment.”
This, however, began to be counteracted in the second half of 201 when, the Commission said, “the economy gradually lost steam”.
“Private consumption growth slowed considerably in the third quarter, while annual export growth in volume terms turned negative for the first time since late 2009. The downward trend is expected to have continued in the final quarter of 2011, in line with the general slowdown in the euro area.
Driven “almost exclusively” by net exports, Malta’s real GDP growth for 2011 as a whole was forecast at 2.1 % , unchanged from the autumn forecast.
EU economy showing ‘signs of stabilisation’
The eurozone, the Commission said, was headed for what it described as a “mild recession”.
Speaking yesterday, Commission Vice-President for Economic and Monetary Affairs Olli Rehn said, “Although growth has stalled, we are seeing signs of stabilisation in the European economy. Economic sentiment is still at low levels, but stress in financial markets is easing. Many of the steps that were essential to deliver financial stability and to establish the conditions for more sustainable growth and job creation have now been taken. With decisive action, we can turn the corner and move from stabilisation to boosting growth and jobs.”
In 2012, GDP growth is forecast to be negative in nine countries, stagnant in one and positive in 17, including Malta. Growth, according to the forecast, will be highest in Latvia, Lithuania and Poland and lowest in Greece and in Portugal.
The overall EU outlook is conditioned by a less supportive global economy, with the ongoing weakening of global demand weighing on net exports. EU business and consumer confidence are still at low levels, although a recent slight improvement has been noted as the financial sector has shown signs of stabilisation.
Credible policies in vulnerable countries and the increasing recognition of the steady progress in tackling the sovereign-debt crisis have helped to stabilise the markets. Sovereign risk perceptions have recently abated somewhat for certain countries, but spreads remain at elevated levels and credit conditions for the private sector have been tightening. While the broad financial-market situation in the EU remains fragile, and uncertainty is still weighing strongly on private investment and consumption, the risk of a credit crunch has been reduced, largely due to the liquidity measures taken by the ECB.
Also, in the light of subdued demand, credit conditions are not expected to constrain investment and consumption over the forecast horizon.
Overall, a gradual return of confidence and a recovery of investment and consumption in the second half of 2012 are expected, but risks are tilted to the downside.
“If an aggravation of the sovereign-debt crisis were to result ultimately in a credit crunch and a collapse in domestic demand, this would probably entail a deep and prolonged recession,” the Commission warned.
“Upside risks to GDP include a stronger-than-expected rebound of confidence and more resilient global demand, stemming from e.g. a stabilisation of housing markets in the US.
“As regards inflation, risks appear broadly balanced, with major downside risks relating to a sharper-than-expected contraction in GDP, which would also depress underlying price dynamics. On the upside, disruptions of oil supply due to geopolitical tensions and stronger than expected demand from emerging markets might fuel commodity price inflation.”