There is a streak of cautious optimism in the European Commission’s winter economic forecast for 2022. After more than two years of disruptive economic headwinds caused by COVID-19, the return to normality now looks nearer.
Still, identified new and old challenges for the 27 member states persist.
The headline forecast for the EU is that growth this year would fall short of previous forecasts. It predicts a four per cent expansion compared with the 4.3 per cent forecast last autumn.
The good news for Malta is that it is likely to experience the highest growth with a chart-topping six per cent.
The commission says that it remains broadly optimistic about the growth outlook predicting that the EU will stay in a “prolonged and robust expansionary phase” thanks to a strong labour market and rising household spending.
The funds voted by the commission to stimulate growth after the pandemic and to promote investment in the green economy will undoubtedly promote higher economic activity in the next few years.
Even so, there are still doubts about how successful this expenditure will be to address the structural economic weaknesses of some member states.
Malta’s forecast growth is driven mainly by private consumption and public investment. Government consumption is expected to increase at a more subdued rate than in the past two years due to the massive investment in fiscal measures to support the health system and mitigate the impact of COVID-19 on businesses.
The latest local strategy to stimulate growth through increased private consumption is the use of €70 million of ‘helicopter money’ expected to end in the pockets of consumers in the weeks before the election.
The commission’s somewhat optimistic forecasts come with some caveats. The surge in energy prices is set to exert a “more protracted drag” than expected on the Union’s economies.
The mood of economists has changed on the downside risks of fast increasing inflation, even if some are still predicting that, by the end of this year, the rise in inflation will slow down substantially.
So far, Maltese consumers have not felt the full effect of rising energy prices as the government has absorbed most of the increase in fuel costs by subsidising Enemalta.
Paolo Gentiloni, the European Economy Commissioner, argues that, with the headwinds caused by Omicron and a further rise in inflation driven by soaring energy prices and persistent supply chain disruptions fading, “growth should pick up speed again already this spring”.
The rise in geopolitical tensions and the risk of war on the Russia-Ukraine border is another risk that is difficult to quantify.
The effect of possible military confrontation on the EU’s eastern borders on the EU economies remains one of the downside risks that could destroy the latest growth forecasts.
Still, fast-rising inflation arguably remains the highest risk to economic growth in the EU. The European Central Bank may be trying to soothe the nerves of financial markets by promising not to raise interest rates before absolutely necessary. However, steady rises in interest rates are already being priced in the valuation of EU sovereign bonds.
While disruptive headwinds may be slowly fading in the EU, deteriorating public finances are likely to be the issues that may soon need to be addressed to promote sustainable economic growth in some EU member states.