An outlook for the Maltese economy

Last Updated on Thursday, 31 August, 2023 at 9:14 am by Andre Camilleri

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory and also a council member of The Malta Chamber

On the 24th August, the Central Bank of Malta issued a very interesting updated outlook on the Maltese Economy. As a general overview, in this updated outlook, it was outlined that “price pressures remain highly persistent, and inflation is thus expected to remain elevated during most of the forecast horizon. In the short term this is likely to lead to slower growth in private consumption. Furthermore, wage pressures are expected to remain high and adversely affect firms’ profitability in the medium term. Given these factors, economic growth in 2023 is expected to moderate sufficiently to close the output gap. Moreover, international developments, and the lagged transmission of monetary policy tightening, are expected to contribute to a further moderation in growth in 2024 and 2025.”

This means that Malta’s GDP growth is expected to slow down from 7.1% in 2022 to 3.7% in 2023 and then ease further to 3.6% in both 2024 and 2025. This is a slight revision on the downside from previous GDP growth projections issued by the CBM. Private consumption growth is forecasted to slowdown from 9.8% in 2022 to 4.3% in 2023, which shows that consumer demand is likely to normalise following the strong recovery as a result of consumers spending fuelled by the savings accumulated during the pandemic. Add to this the erosion of purchasing power by higher inflation. Thus in 2023, net exports are expected to be the main contributor to GDP growth, as imports are expected to decrease.

This updated economic outlook also included two very interesting research articles. The first one was on the present stickiness of inflation. In essence this research article has outlined that the present inflation is much stickier than any inflation experienced before “The inflation persistence parameter for overall HICP has increased, from 0.66 for the period 1997-2019 to 0.76 for the period 1997-2023 Q2. This would suggest that the half-life (i.e., the speed with which a process returns to its mean) for the full horizon is around 30 months, up from 20 months during the 1997-2019 period……. since the end of 2021, inflation persistence in services inflation has picked up markedly. This has peaked since the beginning of 2023…………We can also observe a very sharp increase in persistence of food inflation since the end of 2021. Similar to goods inflation, inflation persistence in food was rather stable prior to the recent period, except for some increase in the period 2016-2019. Yet, since end 2021, it has exhibited very high persistence, second only to NEIG, which also indicates that the sharp rise in inflation persistence observed until the first half of 2023 was mostly driven by persistently high imported inflation.”

It is also interesting that this report outlines the difficulty in establishing the reasons as to this inflation stickiness due to the close and multiple events that gave rise to price increases.

Another interesting research article is about the profit forecasts for businesses. This article outlines that there was a “strong increase in unit profits and profit margins in 2021 and 2022, that can thus partly be interpreted as a normalisation from the pandemic.” However, going forward things are expected to change. The same research article clearly mentions “firms this year are increasingly worried about their ability to maintain strong profitability levels. In part this reflects very high wage pressures due to inflation compensation and high labour market tightness. During the projection horizon, we expect unit labour costs to increase markedly, and exceed their historical growth….Meanwhile, productivity growth is expected to remain subdued over the projection horizon, as demand for employees is still expected to remain strong…..In view of the expected sharp increase in labour costs over the projection horizon, as well as the projected moderation in price pressures, we expect profitability to be weak.”  I think the message is clear enough. Businesses would be best to take note and act accordingly.

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