Last Updated on Thursday, 13 June, 2024 at 10:36 am by Andre Camilleri
The recent forecast issued by the Central Bank of Malta indicates that economic growth is expected to moderate from the very high growth experienced in the last three years. Going back to what happened in the first quarter of this year, one sees that economic activity in Malta remained rather resilient due to strong domestic demand. On one hand, export activity was affected by the persistently weak international environment. While services exports were positive due to buoyant activity in both tourism and non-tourism sectors.
The Central Bank’s latest economic forecast indicates that Malta’s real GDP growth is expected to moderate from 5.6% in 2023 to 4.3% in 2024 and 3.5% in both 2025 and 2026. Compared to previous projections issued by the Central Bank, this latest projection means that GDP growth has being revised downward by 0.1 percentage point in 2024 and 2025 and up by 0.2 percentage point in 2026. The small GDP revision in 2024 is driven by a downward revision in private consumption and an upward revision in imports, outweighing an upward revision in exports. GDP growth for 2025 was also revised marginally downwards following revisions to investment while growth for 2026 was revised marginally upwards driven by consumption and investment by government.
From 2024, domestic demand is expected to be the main driver of growth, as private consumption continues to grow at a brisk pace and private investment begins to recover. Net exports are also projected to retain a positive contribution over the forecast horizon, driven mainly by services exports. However, their contribution is set to be much smaller than that estimated for 2023, and also more limited compared to that of domestic demand. That being said, private consumption growth is expected to moderate from 7.7% in 2023 to 4.9% in 2024. Government consumption is set to rise by 5.4% in 2024, before moderating to 4.3% in the following years. Overall investment in 2024 is expected to turn positive, growing by 2% after the sharp decline in 2023, reflecting a base effect in the aviation sector. Growth in investment is forecast to pick up gradually to 3.5% in 2025 and 3.7% in 2026. Residential construction is set to decline by 1.5% in 2024, after a period of rapid growth. It is then projected to increase by 0.4% on average in the following years, as incoming permit data signals moderating activity in the sector, while government investment is estimated to decline by 1.2% in 2024. It is then set to rise by 4.3% in 2025 and by 5.9% in 2026. This profile partly reflects domestically funded investment, which is expected to increase slightly in absolute terms but decline as a share of GDP in 2024. EU-funded investment is meanwhile set to be driven by higher take up of Recovery and Resilience Facility (RRF) grants in 2024, and increased take up of funds from the 2021-2027 framework in 2025 and 2026.
Export growth is expected to decelerate somewhat, from 8.7% in 2023 to 4.3% this year. Growth in tourism exports is expected to slow down as the sector has more than fully recovered its pre-pandemic levels. Nevertheless, growth is still expected to remain strong, reflecting expanded flight capacity and improved seasonal distribution. Growth in non-tourism services exports is projected to be below that experienced in the last 10 years, as certain high-growth industries appear to be maturing. With regard to goods exports, weak international demand is expected to hamper growth this year, but they are projected to pick up in the following two years, as growth in foreign demand is set to improve.
The labour market and demand for labour is envisaged to be high. However, demand is expected to moderate over the projection horizon, driven by the projected easing in economic growth and an assumed recovery in productivity. Employment growth is thus expected to stand at 3.7% this year, down from 6.5% in 2023. It is projected to moderate gradually to 2.4% by 2026, as GDP growth slows down. However the labour market is envisaged to remain tight, and, given that the unemployment gap is forecast to be slightly negative. Thus, growth in compensation per employee is projected to accelerate to 5.1% in 2024, before edging down to 3.9% in 2025 and 3.2% in 2026. In essence, a persistently negative unemployment gap implies that labour market tightness will be a key factor driving the wage outlook. However, as tightness dissipates over time, this should dampen upward pressure on wages by 2025 and 2026.
When putting all the above together, it seems evident that business will be faced by a less buoyant economic environment with domestic demand and private consumption decreasing when compared to recent years. On the other hand, pressures on the labour market and hence wage growth are going to remain there. This could result in a decline in profitability of businesses as they see their topline increasing marginally while their wage expenses increasing at a faster rate. This underscores the importance of businesses becoming more efficient by maximising their current workforce, potentially through technology investments and by reviewing their operating processes.
