Economic outlook

The Central Bank of Malta has just issued its latest outlook for the Maltese economy for 2024 to 2026 and thus it would be ideal to review this outlook for this last article of 2024.

According to the Central Bank of Malta’s latest forecasts, real GDP growth is projected to moderate from a robust 7.5% in 2023 to a still healthy 4.9% for 2024. This projected slowdown reflects a convergence towards potential output growth by the end of the forecast period, spanning from 2024 to 2027.

Several factors contributed to this:

• Strong Domestic Demand: Domestic demand is poised to become the primary driver of growth, fuelled by robust private consumption and a rebound in private investment following a contraction in 2023.
• Tourism Rebound: The tourism sector, a cornerstone of Malta’s economy, is expected to continue its recovery, contributing significantly to services exports.
• Government Support: Public investment, particularly in projects financed by the EU’s Recovery and Resilience Fund (RRF), is expected to bolster economic activity.

However, certain challenges and risks remain on the horizon:

• Global Uncertainties: Geopolitical tensions, potential trade disruptions, and higher US tariffs pose risks to Malta’s export-oriented economy.
• Inflationary Pressures: While inflation is expected to moderate, risks remain tilted to the upside due to potential supply chain disruptions, wage pressures, and the impact of green transition policies.
• Fiscal Sustainability: Despite a projected decline in the government deficit, risks to fiscal sustainability persist, primarily due to potential slippages in current expenditure, including higher-than-expected outlays on energy support measures and potential increases in pensions and wages.

A closer examination of the components of GDP growth reveals a nuanced picture:

• Private Consumption: Private consumption is projected to moderate from an 11.2% growth in 2023 to 5.2% for 2024, reflecting a normalisation in consumer demand after a period of robust growth. This moderation is further attributed to an anticipated marginal fall in the saving ratio for 2024 following significant declines in previous years.
• Government Consumption: Government consumption is expected to rise by 5.6% for 2024, largely driven by increased compensation of employees due to newly signed collective agreements, particularly in the education and civil service sectors.
• Investment: A significant recovery in investment is projected for 2024, with both private and government investment contributing to this growth. The residential construction sector is anticipated to remain robust, while non-dwelling private construction investment is

expected to experience a moderate recovery. Government investment, fueled by EU-funded projects, is also expected to be a key driver.

• Net Exports: While net exports are projected to maintain a positive contribution to GDP growth, their impact is anticipated to be smaller compared to 2023, with domestic demand taking centre stage as the primary growth driver.

Malta’s labour market remains robust, characterized by high demand for labour and an unemployment rate projected to remain below 3.5% throughout the forecast period. However, labour market dynamics are expected to moderate in the coming years, driven by the projected easing in economic growth and an anticipated, albeit below-historical-average, recovery in productivity.

Wage growth is expected to continue accelerating for 2024 due to a catch-up effect following the high inflation of recent years and tight labour market conditions. This wage growth is anticipated to moderate in subsequent years as labour market tightness dissipates.

Inflation, as measured by the Harmonized Index of Consumer Prices (HICP), is expected to decline significantly for 2024, reaching 2.5% after hitting 5.6% in 2023. This disinflationary trend is projected to continue, with HICP inflation reaching 2.0% by 2026 and remaining at that level in 2027.

Factors contributing to this moderation in inflation include:

• Easing Food Inflation: Both processed and unprocessed food inflation are projected to moderate, reflecting lower imported inflation.
• Normalizing Supply Chains: Easing international supply chain disruptions are expected to contribute to a moderation in non-energy industrial goods (NEIG) inflation.
• Moderating Services Inflation: Services inflation is projected to decelerate, albeit remaining a significant contributor to overall HICP inflation.

Malta’s public finances are on a path towards improvement, with the general government deficit-to-GDP ratio projected to decline from 4.5% in 2023 to 3.9% for 2024 and further decrease to 2.7% by 2027. This fiscal consolidation is primarily attributed to a projected decline in the share of government expenditure in GDP. This fiscal improvement is dependent on lower projected spending on inflation mitigation measures, coupled with the end of restructuring assistance to Air Malta and strong growth in tax revenue, particularly for 2024.

However, the general government debt ratio is projected to increase throughout the forecast period, reaching 50.9% by 2027. This rise is primarily due to continued primary deficits, which are expected to decline over time, and the impact of equity injections related to the establishment of KM Malta Airlines.

Looking ahead Malta’s economic outlook remains positive, with robust growth projections and a moderating inflationary environment. The continued strength of domestic demand, a recovering tourism sector, and supportive government policies provide a solid foundation for sustained economic activity. However, global uncertainties, potential inflationary pressures, and fiscal sustainability risks remain challenges that warrant careful monitoring and proactive policy measures. Thus, the report outlines the below key areas of focus for policymakers:

• Mitigating External Risks: Strengthening Malta’s resilience to external shocks through diversification efforts and fostering innovation.
• Addressing Inflationary Pressures: Implementing prudent monetary and fiscal policies to manage inflationary expectations and ensure price stability.
• Ensuring Fiscal Sustainability: Pursuing a balanced approach to fiscal consolidation that supports economic growth while addressing long-term sustainability concerns.

In a nutshell, while Malta’s economic prospects remain positive, navigating the challenges ahead will require careful policy coordination and a focus on long-term sustainability.