Malta's economy is likely to grow at a slower rate than previously predicted, the Central Bank believes.
In its latest outlook for the Maltese economy, published on Friday, the Bank said it expects gross domestic product to grow by 5.4 per cent in 2022, 4.9 percent in 2023 and 3.8 per cent in 2024.
Compared to its previous projections, the figure for 2022 represents a downward revision of 0.6 percentage points and 0.4 percentage points in 2023.
"The downward revision reflects the deterioration in the international economic environment due to the Russian invasion of Ukraine and the lockdown measures in Asia. These headwinds have weakened global trade and have exacerbated supply chain disruptions and shortages of key vital inputs.
"Such disruptions have also increased imported price pressures," the Bank said.
Net exports are expected to be the main driver of growth in 2022, it said. The contribution by domestic demand will be significantly lower than last year, though it is expected to drive GDP growth in future years, with the Bank forecasting a "strong contribution from private consumption.
"At the same time, the contribution of net exports is projected to remain positive, reflecting the gradual normalisation of tourism exports and growth in foreign demand more generally."
Annual inflation to reach 5%
Annual inflation, based on the Harmonised Index of Consumer Prices (HICP), is projected to accelerate to five per cent in 2022, from 0.7 per cent in 2021.
Inflation is up across all HICP subcomponents, with the exception of energy due to the government's decision to absorb the cost of energy and fuel price increases.
Inflation will moderate to 2.9 per cent by 2023, the Central Bank believes, easing further to 1.8 per cent the following year.
Employment growth
According to the Bank, employment growth in 2022 is expected to reach 2.9 per cent from 1.6 per cent in 2021. It is set to moderate to just below two per cent by 2024.
Meanwhile, the unemployment rate is projected to decline to 3.3 per cent this year, from 3.5 per cent in 2021 and is expected to hover within this range over the outlook period.
"In view of the expected increase in inflation this year, wage growth is projected to be relatively strong as employees might demand some partial compensation for the increase in prices.
"Nevertheless, nominal wage growth is projected to remain below that of inflation due to some lag in the transmission from prices to wages. In the following years, wage pressures are expected to moderate as the labour market becomes less tight," the Bank said.
Government finances
The Central Bank expects the government to end 2022 with a 5.6 per cent budget deficit, down from the 8 per cent registered in 2021, and expects the deficit to dwindle to 3.2 per cent by 2024.
National debt is expected to at 58.7 per cent of GDP by 2024.
On balance, the Bank said risks to economic activity are to the downside for 2022 and 2023, and on the upside for 2024.
"These risks stem from a possible prolongation of the Russia-Ukraine war. More persistent supply bottlenecks as well as higher input and transport costs, could adversely affect manufacturing output, private consumption, and investment," the Bank noted.
Foreign demand could also be weaker than expected if monetary policy in advanced economies responds more forcibly to inflation than assumed in this baseline, it went on.
The Bank believes the downside risks could be mitigated somewhat by possibly more expansionary domestic fiscal policy, an earlier resolution of the war, as well as the possibility of a faster drawdown of domestic private savings.
"Risks to inflation are on the upside during the entire projection horizon. Indeed, the prolongation of the war, as well as China’s zero-COVID policy, could increase commodity prices further and exacerbate imported price pressures and costs. Finally, wage pressures could be stronger than expected if high inflation persists for a longer period.
On the fiscal side, risks mainly relate to a larger deficit in 2022 and 2023. These mostly reflect the likelihood of additional government support to mitigate rising commodity prices and state aid to Air Malta."