The European Union has forecast growth of 1.5% this year, up from 1.0% last year, going up to 2% next year.

Unemployment is predicted to be 6.4% this year (6.5% last year) decreasing to 6.2% next year.

Public budget balance is forecast to be 2.1% this year, decreasing to 1.8% next year but increasing to 3% in 2015.

Inflation is forecast to decrease to 2.2% this year from last year’s 3.2%, staying 2.2% in 2014.

The Commission titled its report for Malta with the words: Growth gradually gaining pace.

It says:

After decelerating in 2012, economic growth  resumes slowly …

Real GDP growth is expected to have slowed  down further in 2012 as despite a relatively  resilient labour market, consumer confidence was  very low. This was reflected in subdued private  consumption.

Following a significant drop in 2011,  fixed investment stabilised in 2012, against the  background of improving profitability. Net exports  continued to be the main driver of growth,  reflecting the particularly resilient performance of  the tourism sector and sustained growth in  financial services.

Real GDP as a whole is expected to have increased by 1% in 2012 and, as domestic demand gradually  strengthens, growth is projected to  accelerate to  1.5% in 2013 and 2% in 2014. Indeed, domestic  demand is seen to become the main driver of  growth in 2013-14.

Consumer confidence started  improving in the final months of 2012 and this,  added to increasing disposable income, is  projected to support household consumption in  2013-14.

Fixed investments are projected to  improve further, but remain well below pre-crisis  levels. In particular, construction investment is  forecast to pick up slightly on the back of EUfunded projects as well as the electricity  interconnector with Sicily, which is scheduled for  completion by end-2013.

By contrast, housing  investment is expected to remain subdued, in line  with the expected  moderate outlook for the  housing market.

The upturn in domestic demand  will stimulate imports, thereby reducing the trade  balance. However, net exports are expected to  continue to add positively to economic growth and the current-account balance is  forecast to remain  positive over the forecast horizon.

 

… supported by a resilient labour market

The labour market continues to prove resilient and  job creation is projected to remain robust  throughout the forecast horizon, significantly  outperforming the euro-area average. Employment  growth is expected to have reached 1.7% in 2012,  largely on the back of the expanding services  sector, while industrial employment continued  shrinking.

Going forward, as the economic outlook  brightens, employment and average wage growth  are forecast to strengthen and move towards their  pre-crisis average.

The unemployment rate is  projected to remain among the lowest in the euro  area and further narrow to 6.1% in 2014.

Risks to this scenario appear balanced.  The  currently  uncertain political situation in Malta,  ahead of the parliamentary elections in March,  could have a further negative impact on consumer  and business confidence and delay the recovery of  domestic demand in 2013.

On the upside, the  rapidly developing financial sector could benefit  from the assumed stabilisation in the euro-area  financial markets and resuming confidence, thus  supporting real GDP growth.

 

HICP inflation moderates but remains above  euro-area average

Price growth in 2012 was higher than expected and  HICP inflation averaged 3.1%, up from 2.5% in  the previous year. The main reason, however, was  higher prices for tourist services, which are mainly  oriented towards foreigners and therefore have  little impact on domestic consumption.

Indeed, the  domestic measure of inflation, the Retail Price  Index,  actually  shows a slight deceleration  compared to 2011.

HICP inflation is forecast to  slow down in 2013-14. Price growth is expected to  moderate across all main categories in 2013 and in  particular in services, also  due to the relatively  high base in 2012.

As private consumption  recovers, services inflation is expected to pick up  in 2014, but its impact on overall HICP is forecast  to be offset by  slower growth in  foods prices.

Overall, total HICP is expected to be higher than  the euro-area average over the forecast horizon.

 

Budget deficit projected to widen in 2013 in the  absence of a budget

The headline general government deficit  is projected to  have  improved in 2012. Current  primary expenditure is expected to have accelerated, outpacing nominal GDP growth,  mainly due to higher social transfers and subsidies  to the national energy company (Enemalta).

By  contrast, compensation of employees in the public  sector is set to  have  grown at a more moderate  pace as a result  of continued hiring restraints. In  spite of dynamic investment and the planned  equity injection into Air Malta, net capital  expenditure as a share of GDP is projected to have  declined, on account of negative capital asset sales.

Current revenues are projected to  have  increased mainly on the back of measures targeted at  increasing VAT revenue collection.

The draft 2013 budget was presented by the  government at the end of November but failed to  receive parliamentary endorsement. In the absence  of consolidation measures, the deficit in 2013 is  expected to widen.

Current primary expenditure is  forecast to drop by 0.3 pp. of GDP, reflecting a  continuation of the tight recruitment policy in the public sector as well as  subdued  dynamics of  social transfers from the impact of the 2006  pension reform.

Net capital expenditure,  comprising the planned additional equity injection  into Air Malta of 0.6% of GDP, is expected to  grow by 0.5 pp. of GDP. The increase in tax  revenue related to the pick-up in economic activity  only partly compensates for the disappearance of  the one-off revenues expected in 2012. As a result,  current revenues are projected to decline slightly.

In 2014, the deficit is projected to narrow, on the  back of domestic demand-driven growth but also  due to a lower equity injection into Air Malta.

After having improved by more than 1 pp. of GDP  in 2011, the structural deficit is expected to remain  stable  in 2012 and, on a no-policy-change  assumption,  is forecast  to improve by ½ pp.  of  GDP in 2013 and by ¼ pp. of GDP in 2014.

The  debt-to-GDP ratio is  projected to continue  increasing over the forecast horizon, as the primary  balance is not high enough to allow a reduction in

the debt ratio. The main downside risk to this  scenario is related to the financial situation of  Enemalta, which could entail additional subsidies.