The European Commission yesterday reconfirmed a continued strong growth of the Maltese economy in 2007 with the publication of its Autumn 2007 Economic Forecast.

But while growth is expected to continue rising over the course of the year, with the country’s gross domestic product being forecast to grow by 3.1 per cent in real terms by the end of 2007, such growth is expected to slow marginally to 2.8 per cent next year and rebound slightly to 2.9 per cent in 2009.

In terms of employment, the EC observed how growth over the first half of 2007 had increased at a “brisk pace” and that by the year’s end employment will have risen by 1.4 per cent. The pace, however, is forecast to decelerate to 1.2 per cent next year, due to the completion of what it describes as labour-intensive public construction projects, and to remain practically unchanged in 2009.

With job creation expected to be generated primarily by the services sector, Malta’s unemployment rate is expected to progressively decline to 6.5 per cent of the labour force by 2009.

Economic growth over the first half of 2007, the EC observed, was underpinned by higher domestic demand, particularly from private consumption, which is expected to grow by 2.7 per cent this year.

Disposable income, the EC notes, has improved as a result of the employment and earnings increases, as well as revised lower income tax rates and the fall in inflation rates.

The EC also points to higher private consumption levels having been fuelled by cash de-hoarding in anticipation of the euro changeover.

Such growth in domestic demand by the year’s end is expected to amount to 1.5 per cent of GDP growth, or close to half of Malta’s overall GDP growth this year.

By the year’s end, real exports of goods and services are predicted to shrink by some 1.5 per cent, with the slowdown being attributed mainly to “subdued” activity in the electronics sector, which accounts for a large share of Malta’s manufacturing activity. Imports, meanwhile, are expected to shrink by close to three per cent, on account of what the EC describes as a “sharp fall” in capital imports and lower export activity.

As such, the external sector is expected to contribute some 1.5 per cent to Malta’s GDP growth by the end of the year.

HICP inflation, despite high oil prices, is forecast to fall to 0.8 per cent in 2007 as a reflection of declining prices in tourist accommodation, while headline inflation is anticipated to rise to 2.5 per cent due to higher food prices.

Over 2008 and 2009, economic activity is expected to be driven mainly by domestic demand, while the contribution of the external sector is expected to be positive yet lower than in previous years.

Private consumption expenditure is projected to grow by 2.8 per cent in 2008, supported by improved disposable income as a result of further lowering of personal income tax rates and higher transfer payments. In 2009, private consumption is projected to decelerate to 2.7 per cent due to the dissipation of one-off factors supporting consumption in 2008.

Public consumption, meanwhile, is projected to grow by slightly above one per cent next year and in 2009. In 2008 gross fixed capital formation is anticipated to increase by 1.5 per cent, reflecting a recovery from the low levels of the previous year.

For 2009, investment growth is projected to decelerate to 0.6 per cent on the back of lower public gross fixed capital formation. Overall, the contribution of domestic demand to GDP growth is expected to amount to slightly below 2.5 per cent in 2008 and 2.2 per cent in 2009.

Exports of goods and services, meanwhile, are expected to increase by 0.7 per cent in 2008 and by 1.2 per cent in 2009 - underpinned primarily by a further expansion of the pharmaceutical industry.

Exports of services are also projected to grow, reflecting a better performance of the tourist industry, IT and remote gaming sectors.

After falling to 6.7 per cent of GDP, the current account deficit is anticipated to narrow further to 3.8 per cent of GDP in 2007, due to lower imports and a higher value of exports.

The anticipated improvement in exports of services is also forecast to further reduce the current account deficit in 2008 and 2009 to 3.4 per cent and 2.6 per cent of GDP respectively.

As a result of the improvement in the current account deficit, net borrowing from the rest of the world is foreseen to decline throughout the forecast horizon and to be in balance by 2009.

In terms of public finances, the general government deficit is expected to continue its downward path reaching 1.8 per cent of GDP in 2007, mainly as a result of a lower current expenditure ratio.

In 2007, the structural balance, cyclically-adjusted balance net of one-offs, is forecast to improve by slightly less than 0.5 per cent of GDP.

Taking into account the 2008 draft Budget, the deficit for 2008 is projected by the EC to decline to 1.6 per cent of GDP, including a one quarter per cent of GDP in deficit-reducing one-off operations.

Total expenditure is projected to fall by 0.3 per cent of GDP, as a result of a lower current expenditure ratio. Revenue from tax and social contributions, however, is also forecast to decline, which is expected to be partly offset by higher capital transfers.

For 2009, under the no-policy-change scenario, which takes into account changes in interest payments but excludes one-off operations such as land sales, the deficit is expected to be contained at one per cent of GDP – putting Malta well in sight of reaching its budget surplus goal by 2010.

General government debt in 2006 stood at around 64.75 per cent of GDP and is expected to fall to around 63 per cent of GDP in 2007. Under the no-policy-change scenario, the debt ratio is projected to decline further to around 59.25 per cent of GDP by 2009.