Last Updated on Thursday, 18 May, 2023 at 11:17 am by Andre Camilleri
Silvan Mifsud is director of Advisory at EMCS Tax & Advisory. Mr Mifsud is also a Council Member of The Malta Chamber
On 15 May, the EU commission published its economic spring forecast. In essence it outlined how difficult it is to balance taming inflation on one side and not having European economies go into recession territory. The Autumn 2022 Forecast had projected the EU economy to contract in the last quarter of 2022 and the first quarter of 2023. Instead, latest data points indicate a smaller-than-projected contraction in EU economies, in the final quarter of last year and positive growth in the first quarter of 2023. The better starting position lifts the growth outlook for the EU economy for 2023 and marginally for 2024. Compared to the Winter’s 2023 Forecast, the EU’s GDP growth is revised up to 1.0% in 2023 (from 0.8%) and 1.7% in 2024 (from 1.6%).Lower energy prices, abating supply constraints, improved business confidence and a strong labour market underpinned this positive outcome. As for inflation, the headline index continued to decline in the first quarter of 2023, amid sharp deceleration of energy prices, but core inflation firmed, pointing to persistence of price pressures. For the second quarter of 2023, indications suggest continued European economic growth, with services clearly outperforming the manufacturing sector.
However, the above outlined resilience of the EU economy, has also delayed the taming of inflation. Falling energy commodity prices are driving a sharp fall in energy consumption bills and the overall rate of price growth from its October 2022 peak, but core inflation has remained too high. The small contraction of core inflation in April 2023 could suggests that it has also peaked, but the convergence towards target is now expected to take longer. This greater persistence of core inflation will call on monetary authorities to act even more forcefully to stem inflationary pressures. Fiscal policy has an important role to play at this critical juncture. The report outlined that “governments should seize the opportunity of falling energy prices to phase out energy support measures, especially the untargeted ones, to ensure debt sustainability, but also sustain the disinflationary efforts of monetary authorities and limit the risk of entrenching dangerous inflation differentials.”
With regards Malta, in 2023 real GDP is forecast to grow at by 3.9%. This would be a lower GDP growth than what was registered in 2022, which stood at 6.9%, as high inflation limits private consumption and the positive impulse from tourism. However, a real GDP growth of 3.9% forecasted for 2023 is higher than the 3.1% GDP growth for 2023, forecasted in the winter forecast. The same goes for the real GDP growth for 2024, as this is now forecasted to hit 4.1%, up from the 3.7% forecasted in the winter forecast. This spring forecast touches one of the main sensitive points effecting the Maltese economy i.e. its labour market. The report outlines that “Labour and skills shortages are expected to remain the main limiting factors for the Maltese economy over the forecast horizon.” This highlights the importance for businesses to become more efficient in their operations to enable them to grow without the need of employing more persons or at least reducing the rate of how many more people they need to employ to sustain the growth in their business.
From a public expenditure perspective the report assumes that at least until the end of 2024, Malta will remain registering an annual public deficit which is above the 3% of GDP. Moreover it is also forecast that until 2024, Malta’s public debt to GDP ratio will remain below the 60% mark. This will mainly depend on Malta’s achieving the projected growth in GDP, which is largely dependent on how much European economies will manage to tame inflation without being pushed to go in recession territory.