Malta’s real Gross Domestic Product (GDP) growth is expected to slow down from 2.5 per cent in 2005 to 1.75 per cent this year, the European Commission’s latest economic forecast shows.
However, the report published yesterday, states that GDP will again accelerate to around two per cent next year.
Economic activity is projected to be almost exclusively domestically-driven in both years, while the negative contribution of the external sector should narrow significantly.
Private consumption is forecast to grow by around 1.25 per cent this year and accelerate to 1.5 per cent next year on account of higher wage growth, while, following the substantial fiscal consolidation in recent years, public consumption is projected to increase by around one per cent this year and 1.5 per cent next year, the Commission said.
Investment is expected to remain the main contributor to domestic demand, albeit growing at a slower speed than in 2005 due to the completion of some public infrastructure projects, mainly financed by the Italian Protocol and EU Structural Funds.
“Investment growth is projected to ease next year, when the decline in public investment should be partly compensated by higher private investment. Overall, the contribution of domestic demand is projected to attain slightly more than 1.75 percentage points in 2006 and 2007,” the Commission said.
On the back of an improved outlook for the electronics sector and, to a lesser extent, the tourism industry, exports are expected to recover in 2006 and to accelerate further in 2007.
As a result of higher export growth and sustained consumption, imports are also expected to accelerate over the forecast period.
Net exports are projected to detract around 0.25 per cent from GDP growth.
After peaking in 2005, the current account deficit is forecast to fall to around 12.5 per cent of GDP in 2006 and to improve further in 2007. This outcome is mainly explained by a reduction in the imbalance of primary incomes and current transfers over the forecast period.
“The current account deficit is expected to be only partially financed by capital inflows from EU funds. The remaining net external borrowing position is projected to remain around nine per cent of GDP till the end of next year,” the EC said.
Employment growth is expected to decelerate this year as the labour-intensive construction work related to the Mater Dei Hospital approaches completion stage.
Although declines in construction may continue next year, job creation in other activities is expected to pick up owing to improved prospects mainly in the private sector.
The Commission further added that with the restructuring of manufacturing industry almost completed, job losses in traditional sectors should bottom out, while employment will be created by nascent sectors such as pharmaceuticals.
However, the services sector is expected to remain the main contributor to employment growth, due to further expansion in information technology and financial services activities.
Although unemployment is anticipated to rise to 7.5 per cent this year, it should decline marginally next year.
The outlook for inflation shows a rise to almost three per cent this year, both as the impact of the recently introduced market-based utility rates are fully captured by the index and as a result of expected further increases in energy prices. Inflation next year is projected to decline only marginally to around 2.75 per cent, the report stated.
Fiscal consolidation proceeded last year as the deficit declined to 3.3 per cent of GDP. “This year, the general government deficit is expected to decline further to below three per cent as a result of increased government revenue mirroring the domestically-led composition of growth and capital transfers.”
The structural deficit is expected to improve by less than 0.25 per cent of GDP.
Under a no-policy change scenario, which takes into account the reduction in public investment linked with the Mater Dei Hospital but excludes one-off revenue, the deficit is forecast to stand at almost 3.25 per cent next year.
The general government gross debt in 2005 declined below 75 per cent of GDP.
This year, the debt-to-GDP ratio excluding the effect of planned privatisation (estimated at seven per cent of GDP), is expected to fall to 74 per cent. Based on a no-policy change scenario, the debt ratio next year is projected to remain unchanged from the previous year’s level.