Malta’s economic growth is expected to slow down somewhat as public spending is cut in response to EU pressure to reduce the fiscal deficit, according to a forecast issued by Ernst & Young (EY).

In the summer edition of the EY Eurozone Forecast, EY is predicting that Malta’s GDP will grow by 1.8% in real terms this year, down from 2.4% last year – which was, EY pointed out, a better result than initially expected.

EY also forecasts that the growth rate is set remain close to 1.8% per year between 2015 and 2018 – a rate which would be no longer ahead of the Eurozone average albeit one much steadier than the 2009-13 period.

The projections are somewhat less optimistic than those of the European Commission, which forecasts 2.3% annual growth in 2014 and in 2015.

As for the Eurozone, EY predicts GDP growth of 1.1% this year and 1.5% the next. But it predicts that economic growth within the Eurozone will be slightly faster in the next three years, roughly on par with Malta.

Last year’s growth, according to EY, mainly reflected a rebound in private consumption, and the consequent move by consumer goods’ producers to rebuild stocks. A recovery in real wages helped boost consumer spending, as inflation slowed down while a relatively tight labour market continued to drive pay rises upwards.

The increase in disposable income and household spending offset two other factors: the effect of a continued decline in fixed investment and in public consumption as the Maltese government strived to reduce its fiscal deficit, and a dampening of the trade boost registered in the previous year as exports fell faster than imports.

A sharp recovery of next exports is expected between this year and the next, and this is set to encourage a pickup in fixed investment which should gain pace next year. This, according to EY, will be strongest component of domestic demand throughout the coming years, assisted by the long interval that is expected before the European Central Bank starts to tighten up its monetary policy in the wake of its response to the economic crises of past years.

According to the report, Malta’s ostensibly tight labour market is not expected to constrain growth significantly over the next few years, pointing out that the employment of women is set for a period of sustained expansion as long as childcare provision is upgraded.

EY notes that women’s participation rates have risen steadily in past few years and are now approaching 40%, up from 30% in 2004, but adds that there is scope to raise them further, particularly since more women than men over 30 have completed tertiary education, acquiring skills suited to the expanding service sector activities which are often unused at present.

Fiscal deficit ‘must fall further’

In its report, EY observes that the strong economic growth registered last year enabled the Maltese government to make rapid initial progress on reducing the fiscal deficit, which stood at 2.8% in 2013 – less than the 3% threshold which saw Malta placed under an excessive deficit procedure by the European Commission last year.

It remarks that the Commission’s projections have encouraged the government to believe that the EDP will be formally ended this year, but stressed that the EU would first check that Malta’s budget strategy is sufficient to keep the deficit declining in the medium term, to enable public debt to fall from its current level, which is slightly over 70% of the GDP.

But EY adds that if its less optimistic economic growth forecasts pan out, Malta may find last year’s deficit reduction a hard act to repeat, and that the EU would keep up external pressure to consolidate the budget even if the EDP is formally closed.

The report points out that despite its small size, Malta’s public finances attract particular attention from Brussels due to a national consensus on public pensions and healthcare provisions, whose costs are set to rise as the population ages.

Since Malta still qualifies for EU regional aid under 2014-2020 framework, EY notes that there will still be scope for intervention aimed at creating jobs and spreading them to more disadvantaged areas, but warns that the reduction of net EU structural funding as Malta is reclassified from a “less developed” to a “transition” region will have an effect.

EY also observes that future governments’ scope to counter economic downturns will be restricted by pressure for permanently lower deficits.

The EY report also refers to the sale of a 33% stake in Enemalta to a Chinese company, stating that this will help to reduce public debt and accelerate the modernisation of Malta’s power generation, as well as turn energy into an export sector if plans to supply wind and solar facilities to other EU countries are followed through.