Malta's economy is projected to grow the fastest in the European Union, according to the European Commission's Winter 2019 Economic Forecast.

The report says the European economy is expected to grow for the seventh year in a row in 2019 but forecasts have been slashed as an unexpected slowdown in Germany and protests in France weighed on the economy in Europe.

But there is wind in Malta's sails, with growth project at 5.2 per cent this year and 6.4 per cent next year, by far the best among EU member states. Next up is Ireland with a growth forecast of 4.1% this year and 3.7% next year. 

The commission, the EU's executive arm, is now expecting growth of 1.3 percent in the eurozone this year, a significant cut from 1.9 percent predicted in November.

The health of the German economy is fast emerging as a worry for the EU as slumping demand for foreign cars in China takes a toll on Europe's export powerhouse.

The commission said Europe is facing international headwinds that have now taken the steam out of a post-crisis recovery in the eurozone.

The slowdown "reflects external factors, such as trade tensions and the slowdown in emerging markets, notably in China," said European Commission Vice President Valdis Dombrovskis.

"The possibility of a disruptive Brexit creates additional uncertainty," he added.

Another problem is Italy, which the commission said would grow by a paltry 0.2 percent this year, still better than a recession, but a huge cut from the 1.2 percent forecast late last year.

Slower growth spells big trouble for populist-led Italy, where huge amounts of government money are swallowed up each year to help pay down about two trillion euros in public debt.

Rome's coalition government of the anti-establishment Five Star Movement (M5S) and the League party was already forced to water down its ambitious budget in December to avoid being punished by the EU Commission and financial markets.

The latest growth forecast may force Italy to again review its spending plans for 2019 in order to satisfy Brussels and assuage investors. 

Malta - Domestic demand replaces net exports as main driver 

In its comments about Malta, the Commission said the economy maintained a strong growth trajectory in 2018, with a particularly brisk expansion in the third
quarter. Real GDP growth is estimated to have reached 6.2% in 2018, making Malta one of the most dynamic economies in the EU.

Starting from the second quarter of 2018, domestic demand replaced net exports as the main driver of growth.

Private consumption has been buoyant, reflecting strong employment growth, increasing disposable income and a large accumulation of savings in recent years. Investment remained subdued in the first three quarters of 2018,
especially in non-residential construction and transport.

Export growth slowed down from the high rates registered in recent years due to a weaker external environment and a drop in goods exports, while imports have
started to recover, supported by strong domestic demand.

Growth is expected to continue over the forecast horizon, albeit at a slower pace.  

Investment growth is expected to pick up on the back of large-scale infrastructure projects in the health, tourism and real estate sectors. The current account surplus is projected to remain large, reflecting the significant trade
surplus of the internationally-oriented services sector.

The Commission said consumer price inflation began to accelerate in Malta in the second quarter of 2018 and reached 1.7% by the end of the year. In part, the acceleration reflected the statistical impact of the increase in the weight of accommodation services in the price index basket for 2018.

Despite tighter labour market conditions, wage pressures have yet to
fully materialise. As wage growth starts gaining pace, inflation should gradually rise to 1.9% in 2020, it warned.