Fabian Demicoli

MALTA: Growth gradually gaining pace

In its report on growth prospects in
Europe and the various member states the Commission reports that real GDP in
Malta as a whole is expected to have increased by 1% in 2012 and, as domestic
demand gradually strengthens, growth is projected to  accelerate to 1.5% in 2013 and 2% in 2014.

Indeed, domestic demand is seen to become the main driver of  growth in 2013-14. Consumer confidence
started improving in the final months of 2012 and this, added to increasing
disposable income, is projected to support household consumption in 2013-14.
Fixed investments are projected to improve further.

In particular, construction investment
is forecast to pick up on the back of EU funded projects as well as the
electricity interconnector with Sicily, which is scheduled for completion by
end-2013. By contrast, housing investment is expected to remain subdued, in
line with the expected  moderate outlook
for the housing market. The upturn in domestic demand will stimulate imports,
thereby reducing the trade balance. However, net exports are expected to
continue to add positively to economic growth and the current-account balance
is  forecast to remain  positive over the forecast horizon.

The labour market continues to prove
resilient and job creation is projected to remain robust throughout the
forecast horizon, significantly outperforming the euro-area average. Employment
growth is expected to have reached 1.7% in 2012, largely on the back of the
expanding services sector, while industrial employment continued shrinking.
Going forward, as the economic outlook brightens, employment and average wage
growth are forecast to strengthen and move towards their pre-crisis average.
The unemployment rate is projected to remain among the lowest in the euro area
and further narrow to 6.1% in 2014.

Risks to this scenario appear balanced.
The currently  uncertain political
situation in Malta, ahead of the parliamentary elections in March, could have a
further negative impact on consumer and business confidence and delay the
recovery of domestic demand in 2013. On the upside, the rapidly developing
financial sector could benefit from the assumed stabilisation in the euro-area
financial markets and resuming confidence, thus supporting real GDP growth.

deficit projected to widen in 2013 in the absence of a budget

The headline general government
deficit  is projected to  have 
improved in 2012. Current primary expenditure is expected to have
accelerated, outpacing nominal GDP growth, mainly due to higher social
transfers and subsidies to the national energy company (Enemalta). By contrast,
compensation of employees in the public sector is set to  have 
grown at a more moderate pace as a result  of continued hiring restraints. 

Current primary 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 
subdued  dynamics of social
transfers from the impact of the 2006 pension reform. Net capital expenditure
is expected to

grow by 0.5 pp. of GDP. The increase in
tax revenue related to the pick-up in economic activity. As a result, current
revenues are projected to decline slightly. In 2014, the deficit is projected
to narrow, on the back of domestic demand-driven growth.

After having improved by more than 1
pp. of GDP in 2011, the structural deficit is expected to remain stable  in 2012 and, on a no-policy-change
assumption,  is forecast  to improve by ½ pp. of GDP in 2013 and by ¼
pp. of GDP in 2014. The main downside risk to this scenario is related to the
financial situation of Enemalta, which could entail additional subsidies.

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