Malta’s economy risks seeing private consumption slow down and investment postponed if the ongoing political crisis persists, the Central Bank of Malta has predicted. 

The Central Bank believes that while risks to public finances are low for this year, that could change in 2020 if political uncertainty is prolonged and risks from lower domestic demand materialise. 

Prolonged political uncertainty would most likely end up being reflected in postponed private consumption and investment, with the government’s tax revenues also potentially being affected. 

It however cautioned that it was still early to predict the economic impacts of political instability with any measure of certainty,  saying “at the current juncture the Bank does not have as yet sufficient information to gauge this impact". 

The projections form part of the Central Bank’s outlook for the period stretching 2019 to 2022, when it is expecting economic growth to remain strong, averaging 4.1 percent. 

According to its projections, growth in private consumption and government expenditure is expected to remain robust while investment will ‘recover’ from its 2018 downsizing.

However, compared with the bank’s previous projections, gross domestic product growth has been revised downwards in 2019 because of a weaker than expected outturn in private consumption in the first half of the year. 

In its latest projections, published on Monday, the bank said that GDP growth will be supported by domestic demand, mainly reflecting robust growth in private consumption and investment.

Conversely, the net export contribution to growth is expected to be negative in 2019, reflecting the weak international environment and a pick-up in import growth as a result of strong domestic demand. 

The contribution of net exports should turn positive in 2020, reflecting acceleration in export growth and lower imports of capital machinery as investment. 

Job creation set to moderate 

The pace of job creation is set to moderate but remain strong. 
The labour market is expected to remain tight, with the unemployment rate projected at 3.8 per cent by 2022. 

According to National Statistics Office published this year, the seasonally adjusted monthly unemployment rate in June 2019 was 3.4 percent, down from 3.9 percent a year earlier.

A looming Brexit

Looking ahead, the Central Bank noted that the external environment posed downside risks to the projections of economic activity and inflation. 

The bank updated its estimates of the potential impact of Brexit on the Maltese economy in light of recent events and proposed two scenarios. 

The first one would see the UK having access to a free-trade or customs-union-like agreement with the EU while in the second one, following unsuccessful negotiations trade would default to World Trade Organisation rules. The Bank estimates Malta’s GDP to decline by between 0.19 percent and 0.39 percent between 2019 and 2021. 

While this impact is lower than the 0.5 percent as suggested in a previous study by the Bank in 2017, “it is important to treat these results with caution given the high degree of uncertainty that still surrounds the terms of the UK’s exit from the EU.”

GDP growth projections tilted to the downside

In the short to medium term, the main downside risks remain external.
In its report, the bank sheds light on economic growth in some of Malta’s trading partners, where if weaknesses persisted, it was likely to effect negatively Malta’s export performance.

“Trade tensions and uncertainty about Brexit remain, which could lead to lower foreign demand and, consequently, lower than anticipated export growth.”

Domestic risks were also tilted to the downside. The downward revision to private consumption growth in this latest projection due to a weak outturn in the first half of 2019 may not necessarily be reflected in the annual figures, as employment growth has remained strong.

Still, “the heightened political uncertainty towards the end of 2019 could offset this effect, although at the current juncture the bank does not have as yet sufficient information to gauge this impact.”

Annual inflation to ease slightly

Based on the Harmonised Index of Consumer Prices, annual inflation is projected to ease slightly in 2019, before edging up to 1.9 percent by 2022, reflecting a pick-up in services and non-energy industrial goods inflation.

Moreover, the government balance is expected to remain in surplus over the coming years, such that the debt-to-GDP ratio is projected to decline to just over 35 percent in 2022. 

These forecasts incorporate the measures announced in the government’s 2020 Budget.

Read the full report here.