Maltese economy recovering - EU

The Maltese economy is recovering following a period of decline due to internal restructuring and a negative international situation, according to a new report by the European Commission.

The report, issued by the directorate general for economic and financial affairs, forecasts acceleration in real economic growth during the current year and in 2006.

The report came with the Commission's Spring Economic Forecasts, a publication presented during a press conference by Economic and Monetary Affairs Commissioner Joachim Almunia in Brussels.

In its analysis of Malta, the Commission says the country's real Gross Domestic Product (GDP) is expected to accelerate to 1.7 per cent in 2005 and to 1.9 per cent the following year.

Supported by a recovery in employment, private consumption is projected to grow by one per cent in 2005, barely changed from the previous year, while it should accelerate to 1.5 per cent in 2006.

The ongoing fiscal consolidation programme is likely to keep growth of public consumption rather flat over the forecast period. The gradual completion of some important public investment projects, which should boost gross fixed capital formation to 6.6 per cent in 2005, would lower investment growth to 1.9 per cent in 2006, the report says.

Although the EU is forecasting a steady growth in the Maltese economy during 2005-2006, the growth rate is still expected to be lower than the EU average. The average growth rate in the 25 EU member states is expected to be two per cent for this year and 2.3 per cent in 2006.

Along with GDP growth, the Commission forecasts positive developments in other important economic indicators.

Exports should gain momentum, pulled up by stronger demand for semiconductors, growing by 3.3 per cent in 2005 and 2006. The commission said that conversely, imports are expected to lose some pace, as the completion of the investment projects is progressively achieved.

With regard to employment, the Commission says job creation is expected to accelerate as economic recovery gains momentum and the restructuring process in the manufacturing sector is concluded. Unemployment is expected to decline "smoothly" throughout the forecast period from 7.3 per cent in 2004 to seven per cent in 2006.

On inflation, the Commission says that despite the rise in energy and water prices, inflation is expected to further decline to 2.4 per cent in 2005 and 2.1 per cent in 2006. This decline will mainly be due to the phasing out of the impact of the 2004 VAT rise, along with an increase in product competition.

The Commission also reaffirms the consolidation process of the public finances taking place. The consolidation measures implemented in the 2004 budget brought the deficit down to 5.2 per cent of GDP, from a recently revised deficit of over 10 per cent of GDP in 2003.

The revenue-increasing measures and the expenditure cuts planned in the 2005 budget are expected to reduce the general government deficit to 3.9 per cent of GDP, while the debt-to-GDP ratio would reach 76.4 per cent of GDP in 2005, up from 75 per cent in 2004. For 2006, the deficit is expected to further decrease to 2.8 per cent of GDP and the debt ratio to rise to 77 per cent of GDP.

The analysis makes it clear that these projections are based on the usual non-policy change scenario for revenues and current expenditure. "However, the projection for capital expenditures incorporates the fall associated with the finalisation of the Italian Protocol. The debt figures do not take on board the eventual effect of stock-flows adjustments produced by some privatisation operations foreseen by the government."

The Commission's report includes a detailed analysis of Malta's economic developments last year. It states that after falling in real terms by 1.8 per cent in 2003, GDP growth turned positive to 1.5 per cent in 2004. Private consumption decelerated to one per cent in 2004 (from two per cent in 2003), reflecting lower disposable income. "This was mainly the result of an increase in taxes when wage growth remained barely changed."

On the other hand, ongoing fiscal consolidation led public consumption to further slow down to a meagre 0.6 per cent. Gross fixed capital formation growth fell sharply to 5.3 per cent from 34 per cent in 2003, although this is attributable to a base effect caused by a one-off operation registered as a negative investment in 2002.

Exports of goods and services briskly recovered to +2.5 per cent in 2004 from -3.8 per cent in 2003, mirroring stronger world demand for semiconductors and the improvement in the tourist sector. Import growth halved to 3.5 per cent due to an unforeseen deceleration in the import of goods.

In 2004, employment increased by 1.4 per cent, after a fall in the previous year, due to the completion of industrial restructuring. Inflation stood at 2.7 per cent, significantly below the figure projected by the Commission's previous forecast.