The forecasts for Malta’s economy for 2023 and 2024 are generally favourable.
This is confirmed by a number of local and international organisations, including the Central Bank, the rating agency Fitch and the European Commission. All these organisations concur that the predictions made by the minister of finance in the 2023 Budget speech are achievable.
Different economic models project different growth rates depending on the underlying assumptions that drive these models. But the general trend for the next two years is broadly positive.
Fitch is projecting a GDP growth of 3.4 per cent next year while the EC forecasts a more subdued rate of 2.8 per cent. This still contrasts with the depressing general forecast from Brussels that sees “broad stagnation and high inflation” across the 27-nation bloc, “with an overall winter recession”.
Prime Minister Robert Abela may have revealed a touch of hubris when he wrote on Twitter: “After the IMF forecast that next year’s Malta’s growth will be six times the EU average, now the European Commission is predicting that our economic growth will be nine times the EU average”.
A more sobering analysis of what is behind these favourable forecasts should highlight some caveats that would counter the risk of overconfidence in the management of the economy.
Maltese households and businesses have been sheltered from the strong impact of energy and food prices thanks to generous subsidies financed by more public borrowing. Most other EU member states helped their citizens weather these shocks but not to the extent experienced in Malta.
The commission remarks that, while unemployment and inflation rates in Malta are expected to rank better than those in most other EU member states, the same cannot be said of the national deficit, which is expected to be among the EU’s highest. While the generous subsidies on energy and food services are sustainable in the short term because of relatively strong public finances, the long-term fiscal impact of this strategy will undoubtedly have a negative effect on the public purse.
Well-known weaknesses in the country’s economic model have still not been addressed to reassure those who worry about the sustainability of this model.
The commission confirms that Malta will continue to grow its labour force by attracting foreign workers. The liberal labour market strategies are impacting various aspects of day-to-day living that define people’s quality of life. So far, not much has been said by policymakers on how they will ensure that prosperity goes beyond achieving ambitious economic performance indicators.
Another caveat that policymakers need to heed is that 2022 was characterised by sustained domestic demand and a strong contribution from net exports. Mass tourism continues to recover as low-cost airlines and accommodation availability still attract sufficient European visitors. However, the commission argues that this demand for services from foreigners could come under threat “given the expected economic slowdown that Malta’s main trading partners face, coupled with continued pressures on supply chains”.
Malta’s open economy has some remarkable strengths and other potentially lethal weaknesses. The external shocks that could impact the economy are real. These include the EU legal challenge to the passports scheme, changes in international taxation and an economic downturn in the countries we trade with.
Re-engineering the country’s economic model to make it more sustainable continues to be a nebulous project. Neglect of the need to lay solid foundations for long-term prosperity could one day threaten the feel-good factor that policymakers seem to believe will last forever.