Stronger economic recovery forecast for Malta in 2004

A report by the European Commission forecasts a more visible economic recovery in Malta next year when growth is anticipated to be about 3.7 per cent "as uncertainty dissipates and external demand picks up".

The report on the 10 acceding countries forecasts solid economic growth of around four per cent for the acceding countries.

So far as Malta is concerned, the European Commission forecasts that after a marked deceleration in 2001, the Maltese economy showed signs of a recovery in 2002, when GDP growth is estimated to have reached three per cent.

On Malta, the report concludes:

¤ Output growth resumed in 2002, led by domestic demand and a slight recovery of manufacturing exports. Domestic demand is expected to be a driving factor for growth over the forecast period, enhanced by increasing external demand in 2004.

¤ Unemployment is expected to be on a decreasing trend after reaching a peak in the first half of 2003, induced by higher investment and external demand.

¤ The general government deficit is expected to gradually decline, although persistent pressures on current expenditure are likely to keep it relatively high.

The report said that positive developments stemmed primarily from relatively strong private consumption and a recovery of manufacturing exports initiated in the second half of the year. Prospects of a rapid recovery were nevertheless unclear, as a high degree of economic uncertainty affected the tourism and electronics sectors. The contribution of domestic demand to growth was somewhat mixed in 2002, as high public and private consumption contrasted with a further decline in investment. The performance of the external sector remained weak as global demand was disappointing, exerting a particularly negative influence on the tourism sector.

"GDP growth is expected to remain below potential in 2003, hindered by high geopolitical and economic uncertainty. A more visible recovery is expected in 2004, when growth is forecast to be around 3.7 per cent, as uncertainty dissipates and external demand picks up. Domestic demand is estimated to be a leading factor for growth over the forecast, underpinned by investment growth. Private consumption growth is expected to remain relatively strong, as disposable income is likely to increase due to the recent widening of income tax bands and salary increases for civil servants."

Although private consumption growth was forecast to decelerate slightly in 2003, due to high uncertainty and higher unemployment in the first half of the year, it was expected to increase to about three per cent in 2004. Public consumption was estimated to gradually decrease its contribution to output growth. While employment in the government sector was expected to decrease slightly, consumption of goods and services related to health and education was foreseen to remain relatively high. This was forecast to lead public consumption growth to around one per cent in 2004.

"Investment growth is estimated to start a gradual recovery in 2003 and reach about four per cent in 2004, to some extent induced by accession prospects and increasing competitive pressures.

"The external sector is foreseen to recover progressively. Although the contribution of net exports to growth decreased in 2002, positive signs became visible, as exports increased in the second half of the year. This was largely due to higher exports of electronic components and is estimated to have led real exports to increase by 0.6 per cent, while imports declined marginally in the wake of lower investment in machinery. The external sector is expected to improve in 2003 as foreign demand increases, but activity in the tourism sector is forecast to remain subdued and a strong recovery of exports is not anticipated until 2004.

"As uncertainty diminishes and external demand becomes more robust, export growth is expected to outpace import growth and be a leading factor for GDP growth in 2004."

The reports suggest that as a result of these developments, the current account is expected to slightly decrease to 4.7 per cent of GDP in 2002. Although a slight deterioration of the deficit in 2003 is foreseen, mainly due to weak activity in the tourism sector and to an anticipated recovery of imports, the current account deficit was expected to decrease in 2004 down to 4.2 per cent of GDP, driven by an expected recovery of the tourism sector.

Unemployment (according to labour force survey statistics) has been increasing in the last months and was likely to reach a peak at close to seven per cent in the first half of 2003. Developments in the private sector largely explain the increase, as low activity in tourism and manufacturing accounted for most job losses.

Unemployment was forecast to start a decreasing trend in the second half of 2003, as the recovery in external demand and investment took place and increased the demand for jobs. This would be underpinned by the recovery of the tourism sector towards 2004, when unemployment was expected to decrease to 6.2 per cent.

"Inflation decreased to 2.2 per cent in 2002, mostly explained by declining food prices. Although inflation is expected to be somewhat higher in 2003 due to high oil prices in the first months of the year, core inflation is expected to remain low over the forecast. Inflation is estimated to decrease to 2.4 per cent in 2004, following an anticipated decrease in oil prices. Other factors, such as the lack of indirect tax increases, enterprise restructuring and low inflation from Malta's major trading partners, are expected to keep inflation under control."

On the decrease in the financial deficit, the report says that the declining trend of the general government deficit is estimated to have restarted after being interrupted in 2001. "It is expected to have decreased to 6.1 per cent in 2002 and to keep the declining trend over the forecast period. On the revenue side, higher growth together with more efficient tax collection are expected to continue increasing revenues."

On the expenditure-side, stricter control and expected privatisation transactions will limit growth of interest payments on debt, which increased sharply in 2001-2002, but other categories of expenditure such as education, agriculture and health, and the costs of implementation of the acquis "are expected to remain, putting pressure on expenditure and make fiscal consolidation somewhat slow, with the deficit remaining relatively high at above four per cent in 2004."