The European Commission has recommended a lifting the Excessive Deficit Prodecure for Malta in view of the country's consistent path towards a smaller deficit, Finance Minister Tonio Fenech said this afternoon.

He said the decision was taken in view of the fact that Malta's deficit had slipped below 3% of GDP last year and remained below that threshold.

Speaking at a press conference, Mr Fenech also welcomed an assessment of Malta's economy made by the Commission in its autumn country report.

"Economic growth rebounded in the second quarter of 2012 and soft indicators suggest it is still picking up in the second half of the year. For 2012 as a whole, real GDP is forecast to expand by 1%, driven entirely by net exports, which benefit from improved external competitiveness and a remarkably resilient tourist sector. These developments are projected to result in a marked improvement in the current-account balance, which is forecast to reach a surplus of around 2% of GDP, after having recorded a deficit for over a decade. On the downside, domestic demand, including inventories, appears to be rather weak and is forecast to be a drag on growth in 2012," the Commission said.

A gradual recovery in domestic demand is projected to underpin the expansion in economic activity in 2013-14. Investment is projected to continue recovering slowly on the back of EU-funded projects, given the approaching end of the 2007-13 programming period, as well as the construction of the electricity interconnector with Sicily.

Household consumption is projected to slowly recover in 2013-14, mostly on the back of a resilient labour market and higher disposable income. Employment is expected to increase over the forecast horizon, albeit at somewhat more subdued rates compared to 2010-11. Average wages are also set to continue growing, partly boosted by the mandatory wage indexation, particularly in 2013, and partly reflecting a composition effect, as new jobs are likely to be created in high-skilled occupations.

The Commission warned that inflation is projected to average 2.9% this year, slightly higher than last year, before moderating to 2.2% in 2013-14.

After improving by 1 pp. of GDP in 2011, the structural deficit is set to stabilise in 2012 and, on a no-policy-change basis, to improve by ¼ pp. of GDP in 2013 and by ½ pp. of GDP in 2014. The main downside risk to this scenario is related to the possible need for additional subsidies to Enemalta.


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