The European Commission’s Economic and Financial Affairs DG on Wednesdayissued its autumn Economic Forecast for all EU member states.

In general, the document forecast the near future as “sailing through rough waters”.

“GDP is forecast to contract by 0.3% in the EU and by 0.4% in the euro area this year. In 2013, economic growth is expected to gradually return, with some further strengthening in 2014,” the report said.

The whole report can be viewed on: http://ec.europa.eu/economy_finance/eu/forecasts/2012_autumn_forecast_en.htm

Malta

Economic recovery following the recession lost momentum

As regards Malta, this is what the report had to say: The impressive rebound in 2010, from the recession in 2009, lost steam in 2011. The weakening in economic activity was particularly pronounced at the end of 2011 and the beginning of 2012 when the economy was reported to have slipped back into technical recession.

Economic growth rebounded in the second quarter of 2012 and soft indicators suggest it is still picking up in the second half of the year.

For 2012 as a whole, real GDP is forecast to expand by 1%, driven entirely by net exports, which benefit from improved external competitiveness and a remarkably resilient tourist sector. These developments are projected to result in a marked improvement in the current-account balance, which is forecast to reach a surplus of around 2% of GDP, after having recorded a deficit for over a decade. On the downside, domestic demand, including inventories, appears to be rather weak and is forecast to be a drag on growth in 2012.

Rebalancing of growth and moderate expansion in 2013-14

Real GDP growth is projected to pick up in the outer years of the forecast horizon. While it is projected to remain slower than the pre-crisis period, reaching 1.6% in 2013 and 2.1% in 2014, it will still outpace the euro-area average.

A gradual recovery in domestic demand is projected to underpin the expansion in economic activity in 2013-14. Investment is projected to continue recovering slowly on the back of EU funded projects, given the approaching end of the 2007-13 programming period, as well as the construction of the electricity interconnector with Sicily.

Furthermore, domestic banks are expected to remain well-capitalised and therefore well positioned to finance higher credit demand by the corporate sector. The investment-to-GDP ratio, however, is expected to remain relatively low compared to the pre-crisis years.

Household consumption is projected to slowly recover in 2013-14, mostly on the back of a resilient labour market and higher disposable income.

Employment is expected to increase over the forecast horizon, albeit at somewhat more subdued rates compared to 2010-11. Average wages are also set to continue growing, partly boosted by the mandatory wage indexation, particularly in 2013, and partly reflecting a composition effect, as new jobs are likely to be created in high-skilled occupations.

Risks to the projections are broadly balanced and relate to the ability of the labour market to support a recovery in consumer confidence, as well as to the economic performance in the main trading partners, namely the euro area and south-eastern Asia.

HICP inflation climbs back above euro-area average

HICP inflation is projected to average 2.9% in 2012, slightly higher than in 2011. The acceleration is largely due to the tourist sector where price growth was more dynamic than expected.

Thereafter, HICP inflation is forecast to moderate to 2.2% in 2013-14. Deceleration in 2013 is projected to reflect more moderate price dynamics in the services and food sectors. Energy inflation is forecast to strengthen under the assumption of an increase in electricity prices. Moderation in energy and food price dynamics in 2014 is forecast to be offset by recovering services inflation, thereby keeping overall HICP constant. HICP inflation in 2012-14 is projected to slightly outpace the average for the euro area.

Budget deficit moderates

In 2011 the general government deficit narrowed to 2.7% of GDP, from 3.6% in 2010, mainly driven by higher revenue from the extension of the 2010 scheme for the collection of income tax and social security contributions' arrears.

In 2012 the deficit is projected to narrow slightly, to 2.6% of GDP, while the primary surplus is projected to increase by 0.2 pp. of GDP. The forecast includes the impact of the measures adopted with the 2012 budget and the January review of spending allocations.

As economic growth in 2012 is driven by net exports, the current revenue ratio is projected to increase only slightly compared to 2011 despite, among others, measures to increase VAT revenue collection. Primary current expenditure is set to rise by 0.6 pp. of GDP, on the back of higher social transfers and subsidies to the national energy company (Enemalta), while continued hiring restrictions in the public sector will help contain growth in the wage bill.

Despite dynamic direct investment and the planned equity injection into Air Malta, the ratio of capital expenditure to GDP is set to decline, on account of the proceeds from the concession fee on the local lottery operator, which are recorded as negative capital asset sales.

In the absence of consolidation measures, as the budget had not been presented before the cut-off date, the deficit in 2013 is expected to widen. The current revenue ratio is projected to decline slightly, as the increase in tax revenue related to the pick-up in economic activity only partly compensates for the disappearance of the one-off revenue projected for 2012.

Primary current 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 lower dynamics of social transfers from the gradual impact of the 2006 pension reform.

Net capital expenditure (including the planned additional equity injection into Air Malta of 0.6% of GDP) is expected to grow by 0.5 pp. of GDP. In 2014, the deficit is projected to narrow, also due to a lower equity injection into Air Malta.

After improving by 1 pp. of GDP in 2011, the structural deficit is set to stabilise in 2012 and, on a no-policy-change basis, to improve by ¼ pp. of GDP in 2013 and by ½ pp. of GDP in 2014. The main downside risk to this scenario is related to the possible need for additional subsidies to Enemalta.