Mirror mirror on the wall, what’s in store for the Maltese economy in 2014?

Analysts do not resort to witchcraft, but rather to more sober economic reports. Luckily, the festive season has been quite prolific for the Central Bank of Malta, with no fewer than two publications being issued, the Quarterly Review and the Financial Stability Report Update. Of particular relevance is the new vintage of economic projections prepared by the bank’s staff.

The bottom line? The Central Bank is rather optimistic. In 2014, the economy should perform better than it did last year and in 2012, though not to the levels experienced during Malta’s booming years.

The revised forecasts on economic growth are more positive than the earlier vintage, but also more upbeat when compared to the numbers presented by the Minister of Finance during the last Budget speech.

The Valletta-based institution thus indirectly confirms the minister’s remarks that he erred on the side of caution when presenting his Budget. Forecasts prepared by the Central Bank may differ from those prepared by the government because of newly available information being used, different assumptions made and different mathematical models used.

The Central Bank’s anticipated improvement for 2014 is driven by two main factors. First, consumption is expected to regain some momentum, particularly as the degree of uncertainty, associated with the 2013 election period will not be repeated.

Secondly, investment, which for the past two years had been shrinking, is expected to rebound strongly this year, reflecting two large projects related to the energy sector. Otherwise, the contribution to growth coming from the external sector is expected to be slightly negative as imports are expected to grow faster than exports.

Against this background, the Central Bank expects that the growth in jobs will be sufficient to match the expanding labour supply, the latter boosted by the further increase in the female participation rate, as a result of the various budget initiatives in force. The unemployment rate is thus expected to remain at its current levels.

This view is supported by an interesting research article included in the Review, which notes that “empirical estimates suggest that the rate of output growth consistent with a stable unemployment rate is around 1.5 per cent to two per cent” – which is precisely the growth scenario being envisaged for the Maltese economy.

Likewise, inflation is expected to remain rather low, particularly as some acceleration in the price of services and the effects of higher indirect taxes will be offset by the much anticipated 25 per cent decline in utility prices. The Central Bank also reaffirms that the fiscal deficit-to-GDP ratio will be brought down to below three per cent of GDP by 2014, as revenue growth is expected to outpace that in expenditure.

Overall, the Central Bank paints a rather benign picture: the Maltese economy continuing to perform better than most of its European counterparts. But despite the optimism bias, which naturally captures most of us at this time of year, it is worth exploring some of the downside risks to this rather favourable scenario.

The Central Bank itself acknowledges that the economic situation in the eurozone remains fragile, with possible adverse knock-on effects on the Maltese economy.

Other downside risks are more subtle and can be spotted through a careful reading of the bank’s publications. Indeed the proviso by the Central Bank of the assumed recovery in consumption must be interpreted against other statements contained in the bank’s publications, such as “credit to Maltese residents has been on a persistently downward trend since the beginning of 2009”, and “replies to the Central Bank of Malta’s Bank Lending Survey (BLS) continued to suggest that the weakness in credit developments was largely due to demand-driven factors, rather than credit supply constraints”. Consumption and investment expenditure are to an extent financed through borrowing. If the pace of new borrowing remains low, the outturn for consumption and investment may not be as positive.

This probably explains the governor’s public eagerness to encourage commercial banks to offer more favourable interest rate conditions to their clients.

The usefulness of economic projections lies in the fact that they tell a story. More recent developments, such as the way in which the Arriva debacle will be handled, are naturally not embodied in these forecasts.

Will this have an impact on the government’s finances? Will it reduce consumer confidence? Will it increase inflation? Will it deter investment by foreign companies? We have to wait for the next vintage of the Central Bank’s forecasts to satisfy our curiosity.

And since the start of the year is generally associated with wishlists, it would also be helpful if the Central Bank starts publishing a longer time-forecast horizon.

This will enable a better understanding of the way ahead and at the same time serve as a benchmark with respect to which the longer-dated forecasts presented by the government can be evaluated. An expert opinion is always better than having to resort to a crystal ball!


Malcolm Bray is an economist.


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