Ernst & Young’s GDP forecast for Malta this year is for a relatively strong growth of between 2.0 per cent to 2.5 per cent, “as exports add to the demand boost from the fiscal stimulus”, according to the firm’s latest Eurozone Forecast for Malta.
The forecast said Malta’s recession in 2009 was relatively mild compared with most of the eurozone. It also pointed out that fiscal support is coming to an end and a gradual withdrawal could cause a slight slowdown in 2011.
“GDP increased by 2.5 per cent in Q2 compared with a year earlier, making Malta the eurozone’s third fastest growing economy after Slovakia and Germany. The foundations for a sustainable recovery are in place. In particular, an export recovery began in Q1 and continued in Q2 fuelled by higher Q2 growth in major EU economies, generating stronger performance both in hi-tech industries as well as financial and commercial services,” it said.
The forecast assumes the continuation of current plans for fiscal consolidation in which the fiscal deficit is brought down slowly – not dropping below the level set out in the Maastricht criteria (three per cent of GDP) until 2014.
“The fiscal deficit narrowed sharply over the last year in relation to GDP, while debt service costs remained stable, which means Malta can afford this gradual approach,” Ernst & Young said.
The forecast said that although the EU and the European Central Bank remain highly critical of Malta for overstepping the normal fiscal deficit parameters, the country’s growth, industrial diversification and relatively low inflation clearly separate it from Greece and other problematic “peripheral” members.
“The government is expected to be able to resist pressures for a faster fiscal contraction that would endanger the revival of growth, provided it takes action to control the longer-term growth in state pension, welfare and health care costs,” it said.
The forecast said Malta’s external deficit remains persistent, with rising import costs in the second half of 2010 likely to offset the industrial export expansion in the first half.
“However, growing foreign interest in tourism, light manufacturing and financial services means the financing requirement can be met, against a background of increasing foreign direct investment flows,” it said.
The report said that export-led industrial growth in the first half of the year across new as well as traditional sectors indicates the potential for intermediate and capital goods production to pick up rapidly when Germany and other large erurozone economies return to growth.
“The risk of subdued eurozone expansion could put the brakes on industrial recovery between 2011 and 2013. However, there is scope for financial services expansion as new EU rules move Malta further onto the map for specialist investment funds and other financial products aimed at higher-end investors,” it said.
Ernst & Young said consumer price inflation picked up to 2.5 per cent in July, and double-digit producer inflation confirmed significant underlying pressures.
“These pressures originated from a rise in imported oil prices that was exacerbated by the Q2 euro weakness. Our forecast shows inflation rising further in 2011 to 2.5 per cent and staying above the eurozone average for the next few years, resulting in the need for continued wage restraint to avoid jeopardizing tourism and industrial export growth,” it said.