Economic conditions determine whether business budgets are adequate and financial targets feasible. Therefore, it is important for local businesses to consider the baseline economic outlook for Malta as input for sound business decisions and planning purposes.
The latest macroeconomic forecasts were prepared after the outbreak of the war in Ukraine and thus they reflect the government’s assessment of the possible economic impact created by this conflict.
Malta has limited direct links with Russia and Ukraine, but the country remains vulnerable to trade shocks due to its high interconnectedness to the world economy. Uncertainty is compounded by the fact that the severity of the negative economic effect will ultimately depend on the duration of the war.
The decision by the government to try to shield households and businesses from the full force of the adverse shock means that general economic conditions are expected to remain broadly benign in 2022, albeit less favourable than envisaged at the beginning of the year.
The real GDP growth forecast for 2022 has been lowered from 6.5% to 4.4%. Economic growth is then expected to ease gently, to 3.5% by 2025. In real terms, the Maltese economy is thus forecast to grow at a slower rate than in pre-pandemic years.
Inflation is expected to accelerate to 3.5% in 2022, double the previous forecast of 1.7%. The inflationary effect of the war, although significant, is nevertheless lower than in other European countries. This estimate reflects the government’s decision to absorb the bulk of the additional costs for energy and basic commodities (particularly wheat, grains and animal fodder).
Subsidies protect households and ease costs of production, but they impact public finances negatively. Hence, subsidies can only be a temporary solution. It would be useful for households and businesses to reassess their consumption patterns/production practices, and energy use, in the eventuality that the international price increases that have taken place in recent months become permanent.
Subsidies protect households and ease costs of production, but they impact public finances negatively- Malcolm Bray
Households and businesses would do well to invest in energy efficiency with the help of advantageous financing conditions and grants that are available.
The baseline forecast shows that inflation in Malta is projected to stabilise around 2% between 2023 and 2025. At the current juncture, the government’s assessment is that the risk of a wage-price spiral is contained.
Still, it is important that businesses monitor their costs well and explore options for possible efficiency gains, to compensate for the higher costs from abroad and any wage pressures that may arise.
At a sectoral level, tourism continues to face challenging times. Indeed, the erosion of spending power in Malta’s partner countries could potentially delay the recovery in tourism. This risk is acknowledged in the official projections.
The forecast for the number of tourists in 2022 has been prudently lowered to 63% of the 2019 numbers, compared to the 75% figure which was specified in the previous forecast vintage published in October 2021.
Based on the information available to date, the official scenario does not point to stagnant economic growth and persistent inflation, a situation referred to as ‘stagflation’. This should reassure businesses. However, apart from the negative effects of the war, businesses need to monitor other short-term developments that may be relevant in 2022.
The provisional tax, social security contributions of self-employed persons, and VAT, which fell due between August 2020 and December 2021, and which were not settled because of the COVID-19 concessions may start to be settled from May 2022.
Additionally, the wage supplement to employees whose companies have been impacted by the pandemic will be retained until May 2022. Both developments could have cashflow implications for businesses in Malta.ħ
Malcolm Bray is a market intelligence specialist with Bank of Valletta.