EU Commission’s Spring Economic Forecast and Moody’s

The latest EU Commission’s Economic Forecast, published on the 15^th May, 2024, clearly highlights Malta’s strong forecasted economic growth, when compared to other European countries. This is due to strong tourism flows, the stability in energy prices and the fact that there was almost no pass through of the increase in interest rates. This forecast highlights that Malta’s tight labour market will likely remain a reality to reckon with, as employment growth will remain strong. This means that we will need more foreign workers to join the labour force, with an even higher stress on Malta’s infrastructure. The forecast also mentions that inflation in Malta has lowered in the first month of 2024, mainly thanks to lower services inflation, but with food prices set to remain the fastest growing component.

However, the EU’s commission economic forecast mentions a word of caution on Malta’s public deficit, clearly indicating that public deficit remains high. Having said so, the forecast mentions that public deficit is to drop to 3.9% of GDP by 2025. The reasons for this are clearly spelt out in the report when it is mentioned that a drop in the total debt to GDP ratio in 2023 was possible due to “strong nominal growth and despite the high primary deficit”.

This brings me to the latest Announcement of Periodic Review on Malta, issued by Moody’s on the 24^th May. By and large, Moody’s state very much the same things as outlined by the EU commission on Malta’s forecasted strong economic growth. However, Moody clearly outline a potential risk that would downgrade Malta’s grading if “Moody’s were to see a sustained and significant increase in Malta’s debt burden which would lead to a structural worsening of the country’s public finances”.

When putting all together we have the following sequence of events we are somehow stuck in. As per 2024 Budget estimates, annual public deficits are projected to remain close to the €900m & €800m mark until end 2026. This means that for such public deficits to remain sustainable we need high economic growth as otherwise our annual deficit to GDP ratio and our total public debt to GDP ratio will go haywire. To achieve this higher than European average economic growth we are still banking on bringing in further labour force from abroad, maybe at a lower level than previous years, but still on the increase. This in turn is creating further stress on all our infrastructure at all levels, be it healthcare, transport, energy and drainage, which in turn requires more government expenditure in an attempt to bolster our infrastructure in these areas.  When seeing all this, the obvious question that comes to mind is – Why do we keep assuming that this chain of events and this modus operandi can keep happening ad infinitum? Are we planning for when this cannot keep going on? To do so requires various reforms to address various structural problems in our economy and I dare say way of life, that we have been postponing for way too long.