Last week the European Commission issued its Spring Forecast for 2019. Malta continues to be one of the top performing EU Member States on a number of key economic indicators and its overall performance is definitely robust.
However, this should not translate into complacency especially since a number of risks and challenges can be identified.
Although global economic growth is expected to remain moderate at a rate close to four per cent, reflecting growth in China and the US, Europe’s economic recovery is expected to weaken. Growth is forecast to fall below two per cent on account of country and sector specific conditions, particularly in the euro area. Risks remain on the downside primarily due to global trade tensions that might impinge on growth.
In 2018, Malta was the fastest growing EU Member State with a GDP growth rate of 6.6 per cent compared to the EU average of two per cent. Domestic consumption and demand were particularly strong reflecting the increase in employment and the positive effect this has on income and spending in the economy. Exports were also strong, particularly in the services sector.
Malta continues to consolidate its profile as a service-based economy. As a result, the import content of its exports is falling, leading to a surplus on its balance of trade. Looking ahead, although growth remains robust, it is expected to dampen to 4.8 per cent in 2020. This, however, still exceeds European averages and is above Malta’s historical average.
Looking at the numbers behind the numbers, the European Commission is expecting growth to be solely driven by domestic demand. The contribution of net exports is expected to decline considerably in line with an expected increase in capital investment over the forecast horizon.
For an economy to sustain its future growth, investment is central. Over the coming years, investment is expected to increase, reflecting the government’s plans to invest heavily in the country’s infrastructure.
Although Malta remains a top performer across the EU, there are various challenges on the horizon
The investment is happening across a number of sectors including health, waste and transport. Such an investment will continue generating further employment opportunities but will also constitute a higher import-content.
This public investment is also complemented by a number of private investment projects that are currently under way and set to continue in the coming years. Structural investments in the country will be important contributors to Malta’s investment attractiveness and as a generator of economic activity.
The robust economic performance has led to a very tight labour market. Unemployment rates are considered to be at par with Malta’s natural rate of employment and together with Germany, Malta continues to register the lowest unemployment rates.
The inflow of foreign workers has helped contain wage growth. Malta’s labour market is expected to remain tight. Going forward, growth in public sector employment should be curtailed with resources being diverted to the private sector. Also, further investments in education to reduce skill mismatch is imperative to sustain Malta’s growth.
Malta continues to register sound public finances. With a government surplus reaching two per cent of GDP, the second highest in the EU, this is expected to taper down to below one per cent in 2020. This is due to the expected capital investments that the government will undertake together with higher expenditure on wages and public administration.
In the meantime, the strong windfall from the citizenship scheme is expected to decline. Debt is also expected to continue to decline. It therefore becomes imperative for the government to ensure that structurally, public finances are sound. A greater emphasis on keeping in check expenditure growth, particularly wages, needs to be prioritised.
Although Malta remains a top performer across the EU, there are various challenges on the horizon. Sustainability is key: the risk of eating into tomorrow’s growth remains and that is why we need to remain agile as a country to develop new ecosystems and sectors.
Finding the balance between environmental and social sustainability is also presenting pressing challenges. Longer-term structural and spatial planning is critical, together with a focus on low-wage earners.
The more we become a service-based exporting country, the more our sectoral ecosystems become critical. Stresses on corporate banking and regulatory issues take centre stage. Retention and attraction of investments are dependent on having a financial and banking sector that is conducive and supportive of growth and this to me is one of the biggest challenges Malta is facing.
Failure to act and reform the regulatory quality and the banking sector can be a stark reminder that economies do not depend solely on attractive laws but more on supporting ecosystems.
JP Fabri is an economist and a Regulatory & Advisor Director at ARQ. He is also a visiting lecturer at The University of Malta.
This is a Times of Malta print opinion piece