We reproduce in today’s issue (pages 9 and 10) the full European Commission’s forecast for Malta which was issued on Tuesday but which inexplicably was left out of most mainline news except for the Finance Minister’s take on it, which we also reproduce, minus obviously partisan comments.
The Commission’s analysis, in particular, merits close attention.
The 18-nation eurozone will grow 1.2 percent this year and 1.8 percent in 2015, up from previous estimates in November for 1.1 percent and 1.7 percent, the Commission said.
Similarly, the full 28-member EU will expand 1.5 percent and 2.0 percent, also both revised up by 0.1 percentage point.
As can also be seen at a glance by the table reproduced on page 1, the Commission expects growth in the Maltese economy to remain stable and constant. “Real GDP growth is estimated to have reached 2% in 2013 and projected to maintain the same pace in 2014-15. Domestic demand is seen becoming the main driver of growth, largely on the back of recovering household consumption. The general government deficit is projected to stabilise below 3% of GDP.”
In the Commission’s view, real GDP growth was largely derived from inventories changes than from growth and while there were gains in household consumption, these were offset by a further decline in investment and lower trade volumes. “Real GDP growth was relatively strong in the first three quarters of 2013, largely on the back of the change in inventories component, which is used as a residual item in national accounts. Gains in household consumption were offset by a further decline in investment activity, which is estimated to have contracted for the third consecutive year. Trade volumes surprised on the downside, but the decline in exports was milder than that in imports and thus external trade are seen to have had a slightly positive contribution to growth.”
But, the Commission added, “ Real GDP is estimated to have increased by 2% in 2013 as a whole, up from a mild 0.9% growth in 2012.”
There were further nuances to be found in the Commission’s next phrases: “Favourable labour market conditions and the positive impact of the announced reduction of electricity tariffs are projected to support a further improvement in household consumption.
“With capacity utilisation exceeding its long-term average, investment is projected to improve. The recovery, however, is set to be rather cautious in an environment of low credit growth and higher interest rates, compared to the euro area.
“ Improving domestic demand is expected to boost import growth, but overall net exports are projected to continue to contribute positively to real GDP growth and the current account is forecast to remain in surplus over the forecast horizon.”
On the one hand, “The forecast assumes a stabilisation of the investment-to-GDP ratio and thus a continuation of the downward trend observed in recent years would present a downside risk. At the same time, the structural reforms that the government has committed to enact in the energy sector could lower costs for the economy and boost domestic demand, thus constituting an upside risk, particularly in 2015.”
The Commission is also nuanced and realistic where it speaks of Malta’s fiscal fundamentals. The Commission says: “From 3.3% of GDP in 2012, the budget deficit is expected to decrease to 3.0% of GDP in 2013.” That is somewhat more than the government projected in its 2014 Budget Speech. The Commission then adds: “. The deficit is expected to narrow to 2.7% of GDP. In 2015, on a no-policy-change assumption, the deficit is projected to remain at 2.7% of GDP.”
“After having worsened by ½ pp. of GDP in 2012, the structural deficit is estimated to have improved by 0.7 pp. of GDP in 2013, despite the limited size of the consolidation measures. Thereafter, the structural deficit is projected to improve slightly by 0.2 pp. of GDP in 2014 before deteriorating by 0.3 pp. of GDP in 2015. The debt-to-GDP ratio is projected to reach 72.4% in 2014 and decrease to 71.5% in 2015, following the due repayment of part of a loan from Air Malta.”
On the expenditure side, the Commission says that “Current primary expenditure relative to GDP is forecast to increase by 0.5 pp. despite the spending review at ministry level that started in July 2013.”
“On the capital side, net expenditure, including the planned additional equity injection into Air Malta (0.6% of GDP), is expected to stabilise. Indirect taxes relative to GDP are projected to increase by 0.3 pp., driven also by the recovery in consumption in the second half of the year. Corporate profitability as well as a favourable labour market outlook is expected to drive income taxes, despite measures to gradually reduce the overall income tax levels.”
On the revenue side, “The 2014 budget includes mostly revenue-increasing measures, among which increases in indirect taxation (mainly excise duties), a new programme to grant Maltese citizenship to foreign individuals and families (against the payment of a fee and investments in the country) and the introduction of a new tax regime for rental income.”
There are, in fine, two imponderables in the local scenario: “On the expenditure side, the budget envisages some restrictions on recruitment. “ And “Downside risks relate to the financial situation of Enemalta (the public energy utility corporation) as well as higher than budgeted disbursement related to the car VAT refund scheme.”