Real GDP growth is expected to be 5.6% by the end of the year, after growing by 6.3% in the first half of 2017, the autumn European Economic Forecast has found.
Private consumption is believed to become the main driver of growth on the back of an increasing population and growing disposable income; with domestic demand playing a secondary role to external demand.
In addition, improved consumer confidence and consumption is expected to result in a somewhat lower household saving rate.
Investment on the other hand is set to be sustained by the residential construction sector, which will grow further in 2018.
However, the report noted that while the country is experiencing a very low unemployment rate and increasing skill shortages, wage growth has been limited, due to strong increases in labour supply, on the back of inflows of foreign workers.
Wages are expected to improve as the increase in labour supply slows down.
The surplus achieved by the Labour government also features in the report which projects it to be 0.9% by the end of 2017, but is believed to decline to 0.5% in 2018, a figure that will be sustained in 2019.
The government debt-to-GDP ratio, which fell below the 60% threshold in 2016, is forecast to decline further to 48.8% in 2019.
The findings from the report are below:
Growth momentum remains strong
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.
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.
However, in view of Malta's openness 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.
Price pressures
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 (The Harmonised Index of Consumer Prices) 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.
Risks to the 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.
Government balance to remain in surplus
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, which will be sustained in 2019 (under a no-policy-change assumption.)
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.
The government debt-to-GDP ratio, which fell below the 60% threshold in 2016, is forecast to decline further to 48.8% in 2019.