Last Updated on Thursday, 16 February, 2023 at 2:08 pm by Andre Camilleri
The Central Bank of Malta is projecting that Malta’s gross domestic product (GDP) growth will drop signifcantly from 6.8% in 2022 to 3.7% in 2023, and to ease slightly further to 3.6% and 3.5% in 2024 and 2025, respectively. When compared to the previous projections, the Bank’s latest forecast for headline GDP is broadly unchanged, as upward revisions in private investment and exports were offset by an upward revision in imports.
In 2023, domestic demand is expected to be the main driver of growth as investment begins to recover after last year’s contraction, while consumption is expected to remain relatively robust. The net export contribution is expected to be marginal in 2023, as exports should grow at a significantly slower rate following the strong rebound seen in 2022. Although the contribution of net exports is set to edge up slightly in 2024 and 2025, domestic demand is then expected to remain the main driver of growth in those years.
Employment growth is set to moderate too, from 5.4% in 2022 to 3.3% in 2023, which partly reflects the envisaged slowdown in economic activity towards its potential. Over the rest of the projection horizon, employment growth is set to stand at 2.0%. The unemployment rate is expected to stand at 3.0% in 2023, and to remain at a relatively low level of 3.2% in 2024 and 2025.
In view of the increase in inflation in 2023, together with tight labour market conditions, wage growth is projected to be relatively strong. Nevertheless, nominal wage growth is forecast to remain below consumer price inflation in 2023 due to lags in the transmission from prices to wages. In later years wage growth is expected to remain robust and outpace consumer price inflation.
Annual inflation based on the Harmonised Index of Consumer Prices is projected to remain high in 2023, but significantly lower than in 2022. Indeed, it is envisaged to stand at 4.5% in 2023, down from 6.1% in 2022. The fall in inflation reflects a broad-based decrease across all sub-components of HICP, except for energy inflation. Services is envisaged to be the main contributor to HICP inflation, but non-energy industrial goods (NEIG) and processed food are also projected to contribute strongly to annual HICP inflation in 2023. Inflation is set to ease further in 2024 and 2025 to 2.3% and 2.1%, respectively.
The general government deficit-to-GDP ratio is estimated to have declined to 5.2% of GDP in 2022, from 7.5% in 2021. It is then projected to narrow further to 4.9% of GDP in 2023, and to continue declining over the rest of the forecast horizon, reaching 2.9% of GDP by 2025. This improvement is driven by a declining share of expenditure in GDP, especially following the unwinding of COVID-19 support measures in 2022 and the declining profile of inflation-mitigation measures. The general government debt ratio is estimated to have decreased in 2022 and then increase progressively over the rest of the forecast horizon, stabilising at around 58.0% by 2025.
On balance, risks to economic activity are slightly tilted to the downside in 2023 and more balanced thereafter. The main downside risks relate to the possibility of stronger than envisaged weakness in the international economic environment, which could lead to lower exports. Foreign demand may also be weaker than expected, especially if monetary policy in advanced economies tightens more forcibly than assumed in this projection round. Some of these risks could be mitigated by stronger than expected wage growth, which could offer additional support to household consumption.
Risks to inflation are considered as balanced for the entire projection horizon. Indeed, while the effect of upward price pressures to salaries in Malta and an incomplete lagged pass-through of past increases in energy costs in the euro area could increase commodity prices further, the re-opening of China could be seen as a partial reversal of the previous supply shocks. Also, a stronger pass-through of the recent appreciation of the euro, monetary tightening as well as lower international energy and transport costs should result in downward pressures on inflation.
On the fiscal side, risks are on the downside (deficit-increasing) from 2023 onwards. These mainly reflect the likelihood of State Aid to the national airline, though possible weaker economic growth would also have an impact. These risks may be partly offset by the profile of outlays on price mitigation measures, which could be less than projected if oil and gas prices stabilise at lower levels.