European Union economies are expected to slowly recover this year and return to what they were pre-COVID by the end of next year. This is indeed good news after several months of economic distress due to the medical and economic emergency.

The European Commission has brightened up its outlook for EU economies in its spring economic forecast, especially for Malta. The island is expected to register real GDP growth of 4.6 per cent in 2021 and 6.1 per cent in 2022. This projected growth is even better than the EU average.

This encouraging picture results from the successful vaccine programme that has accelerated throughout the EU in the last few months.

European Commissioner Paolo Gentiloni sounded optimistic when commenting on the upward revision of growth forecasts. He said: “The shadow of COVID-19 is beginning to lift from Europe’s economy.”

However, he also warned against over-optimism when he argued: “The risks will remain high as long as COVID-19 looms over Europe. There are still many unanswered questions about the long-term effectiveness of vaccines and consumers’ desire to spend their accumulated savings might be overestimated (or even underestimated).”

Malta’s recovery is expected to be driven by a rebound in tourism-related services, household consumption and investment. Hopefully, Malta will soon be included in the UK’s green list for travellers, as our tourism industry is still dependant on this market. But uncertainties abound here too: although the UK is advanced in its vaccine roll-out, no country is yet immune from new COVID variants, which could potentially slam the door shut on travel corridors all over again.

Consumer spending is likely to give rise to a retail boom in the short-term, even if it is still uncertain how consumer behaviour might change in the longer-term.

The commission’s brighter outlook is also based on the anticipated impact of Next Generation EU, the bloc’s €750 billion recovery fund. While the fund is still not yet operational, some countries have already presented their projects and grants and loans are expected to be disbursed as early as July.

Malta has apparently still not submitted its request for funds for its preferred projects. This may be a question of timing. But it could also mean that the commission will be linking the grants to conditions that may impinge on Malta’s sensitive economic strategies, including the sale of passports and taxation matters.

In the last several months, the government has pumped enormous amounts of money into businesses to save jobs and prevent the economy from falling into a depression. This strategy has been successful but its costs still need to be quantified and managed in the coming months and years.

The rising debt-to-GDP ratio may not be a significant concern for most people. But it will mean that the government will depend on higher income to balance the books in the coming few years. If the economy starts growing at the impressive rates experienced before the pandemic, an increase in taxation may not be necessary. If not, raising taxes will become inevitable.

While it is crucial to keep fiscal support for business going, some companies that would have benefitted from COVID support might still not be viable when economic normality returns. The delicate task of dealing with gone concerns needs to be managed prudently to ensure that taxpayers’ money is well spent on viable businesses.

Financial markets have had mixed reactions to the brighter economic outlook for Europe. Financial assets keep appreciating. But the risk of much higher inflation may be the start of another economic challenge.