New economic cycle – growth in tax revenue and confidence

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

There are two elements I keep a close eye on, which could give some indication of the likely level of economic growth and the type of economic cycle we could be entering. These are the growth level in government revenue and the registered confidence shown in the economy.

The latest figures in government revenue for the period Jan to July show that revenue has increased by 13.8% over the same period in 2022. In Jan-July 2022 the growth in government revenue was of 14.7% over the same period in 2021. Let us skip the comparison between Jan-July 2021 to the same period in 2020 and the same for the comparison of Jan-July 2020 to the same period in 2019, due to the effect of the pandemic. However, if we were to compare the growth in government revenue Jan-July 2019 to the same period in 2018, the growth was of 16.8%. This indicates that growth in government revenue is decelerating, falling below its long-run average.

With regards confidence, the latest economic update, issued by the Central Bank of Malta, gives some very interesting insights. In July, the European Commission’s Economic Sentiment Indicator (ESI) for Malta reached 109.0, from 100.8 in June. It was therefore above its long-term average of around 100.0, estimated since November 2002. This was due to a strong increase in sentiment in the retail sector and in industry. However, sentiment fell across the remaining sectors. The sharpest decline was recorded in the construction sector, where sentiment turned negative.

In July, sentiment in the retail sector indicator increased to 23.4, from -16.6 in June. The latest rise in sentiment was largely driven by a strong amelioration in retailers’ expectations of business activity over the next three months and by their assessment of sales in recent months. On the other hand, confidence in industry in July reached 10.6 from -20.0 in the previous month. Production expectations for the months ahead turned strongly positive, compared with a month earlier.

On the other hand,  the consumer confidence indicator worsened further in July to -11.8, from -10.4 in June, standing below its long-term average. The fall in consumer sentiment was largely driven by a more negative outlook of the general economic situation and the financial situation over the next 12 months. At the same time, expectations of major purchases over the next 12 months stood less positive. The sentiment indicator for the services sector stood at 29.3 in July, below the 40.1 recorded a month earlier. The latest decrease was driven by movements in firms’ assessment of demand over the past three months. Firms’ assessment of the business situation over the past three months and their expectations of demand over the next three months also weakened. The confidence indicator for the construction sector fell below its long-term average as sentiment decreased to -11.7, from 8.4 in June, reflecting a sharp deterioration in respondents’ assessment of order book levels.

As assessed from the GDP analysis last week, it seems that the new economic cycle in the coming months will be based on an increased manufacturing and industry output and less so from internal domestic spending, the services industry and construction.