The European Commission’s autumn economic forecasts indicate that the European Union is slowly moving from recovery to expansion. In the third quarter of 2021, the EU economy was just below the pre-pandemic output levels and looked set to go into higher gear.

This is a remarkable turnaround. After the global financial crisis in 2008-2009, it took the EU economies more than four years to return to the pre-crisis output level. Substantial fiscal stimulus, loose monetary policy and a successful vaccine roll-out are behind the accelerating recovery being seen right now.

The commission’s forecast for Malta is just as optimistic. GDP growth in 2020 is expected to reach five per cent, in line with the EU average but, in the following two years, Malta’s economic growth is expected to be even higher than the Union’s average. Inflation is expected to reach 1.1 per cent in 2021, compared to an EU average of 2.6 per cent. Malta’s government debt is projected to reach 61.4 per cent in 2021 when compared to an EU average of 92 per cent.

If these forecasts prove reliable, Malta’s economy will reach pre-crisis levels in the second half of 2022. However, economic forecasts are just predictions made on certain assumptions.

If these assumptions turn out to be too optimistic or too pessimistic, the actual indicators might prove quite different from those projected.

Paolo Gentiloni, European commissioner for economic affairs, listed some caveats that should temper the optimism of the forecasts. While pent-up demand is likely to result in a significant rise in consumer spending, the still increasing rate of COVID infections in many EU countries could scupper this growth. The alarming developments in Europe over the past week or so vindicate the commissioner’s caution.

Gentiloni said: “Uncertainty remains substantial and the risks to the outlook are tilted to the downside. The recovery continues to be heavily dependent on the evolution of the pandemic, both within and outside the EU.” These words are particularly relevant to Malta, which depends so heavily on the inflow of tourists from continental Europe and the UK, where the spread of the pandemic is still far from being under control.

At the same time as the commission released its autumn forecasts, the European Central Bank published its financial stability review. The ECB’s headline message was that pandemic risks have eased with recovery but vulnerabilities are building up ahead.

The ECB sees risk in “the housing market and stretched financial asset valuations”. It is especially concerned because of “vulnerabilities rising due to stretched valuations in some asset markets, elevated public and private debt levels and increased risk-taking by non-banks”.

Moreover, global supply chain disruptions persist and are being made worse by rising energy prices that might impact growth in the Union. Price corrections in some real estate and financial markets, especially in countries with elevated valuations before the pandemic, are possible.

The banking sector is today more tightly regulated after the global financial crisis of 2008-2009 and is unlikely to be the reason behind the next crisis. Still, the ECB frets about the impact that non-banks – which include investment funds, insurers, pension funds and asset managers – might have on the economy with an increased risk appetite for lower-rated corporate debt and alternative financial assets.

While the overall picture remains positive, economic policymakers must adopt a firm stance of prudence in charting the way ahead. Tighter macroprudential policies could help address the growing vulnerabilities, especially in the housing markets and the non-bank financial sector.