Malta’s gross domestic product growth is projected to slow down from around 7% in 2022 to 4% in 2023, and to ease slightly further to 3.8% and 3.7% in 2024 and 2025, according to the Central Bank of Malta.

This means the bank revised GDP growth up by 0.3 percentage points in 2023, and by 0.2 percentage points in 2024 and 2025.

In a forecast issued on Friday, the CBM said that in 2023, net exports are expected to be the main contributor to GDP growth. This reflects the expected sharp slowdown in imports as well as robust growth in exports.

Meanwhile, domestic demand is expected to lower growth, as the base effect from the extraordinary investment in 2022 should offset positive contributions from government and private consumption.

From 2024, domestic demand is expected to be the main driver of growth, as private consumption growth is expected to remain relatively robust despite relatively high inflation.

Net exports are also projected to contribute positively in 2024 and 2025, due to robust services exports.

Employment growth is set to moderate to 3.6% in 2023 from 6% in 2022, which partly reflects the envisaged normalisation in economic activity towards potential growth.

In the next two years, employment is set to expand by 2.7% and 2.4%, respectively.

In view of relatively high inflation, as well as tight labour market conditions, nominal wage growth is projected to be relatively strong from a historical perspective.

Compensation per employee

Compensation per employee is thus set to grow by 5.5% in 2023, 4.9% in 2024 and 3.9% in 2025, outpacing consumer price inflation during the later period of the projection horizon.

Annual inflation based on the Harmonised Index of Consumer Prices is projected to moderate to 5.3% in 2023, as international supply bottlenecks are expected to ease further.

However, lingering indirect effects from recent increases in input costs are set to keep inflation high from a historical perspective.

The fall in inflation in 2023 reflects a broad-based decrease across all sub-components of HICP, except for energy inflation, as energy prices are expected to remain unchanged in view of government support measures.

Services are envisaged to be the main contributor to HICP inflation, but food and non-energy industrial goods are also projected to contribute to annual HICP inflation in 2023.

Government deficit 

The general government deficit is set to decline to 4.9% of GDP in 2023, from 5.8% in 2022. It is then set to continue declining over the rest of the forecast horizon, reaching 3.4% of GDP by 2025.

This improvement is driven by a declining share of expenditure in GDP, mainly due to the profile of inflation-mitigation measures.

The general government debt ratio is set to increase throughout the forecast horizon, and to reach 55.3% by 2025. This is driven by the expected level of primary deficits, which partly offset the debt-decreasing impact of the interest-growth differential.

On Friday, CBM also noted that the risks to economic activity are tilted to the downside for 2023 and 2024 and are more balanced thereafter.

The main downside risks relate to the possibility of stronger than envisaged weakness in the international economic environment, which could lead to lower exports.

Foreign demand may also be weaker than expected if the monetary policy in advanced economies tightens more forcibly than assumed in this projection round. GDP data for the first quarter of the year also implies some downside risks to domestic demand.

Risks to inflation are to the upside for the entire projection horizon.

Indeed, inflation could be more persistent than assumed in the baseline projections and could continue to be affected by indirect effects from past increases in commodity prices.

Moreover, second-round effects from higher wages and profit margins could also prolong high inflation. Conversely, further monetary tightening and lower foreign demand could ease inflationary pressures in the medium term.

Additional support measures towards Air Malta

On the fiscal side, risks are on the downside (deficit-increasing), particularly in 2023.

These mainly reflect the likelihood of additional support measures towards Air Malta.

Deficit-decreasing risks in the outer years of the forecast horizon mainly relate to fiscal consolidation pressures as the general escape clause in the Stability and Growth Pact is deactivated at the end of 2023.