Central Bank revises Malta’s 2023 expected growth rate downwards

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According to the Central Bank of Malta latest forecasts, Malta’s gross domestic product (GDP) is projected to grow by 6.8% this year, and by 3.7% in 2023, followed by growth rates of 3.6% and 3.5% in 2024 and 2025, respectively. When compared to the previous set of projections, the Bank’s latest forecast presents an upward revision of 1.6 percentage point for 2022, and downward revisions of 0.8 percentage point for 2023, and 0.1 percentage point for 2024.

The upward revision in 2022 reflects outcomes in the first half of the year which point to more dynamic economic activity than previously envisaged, especially in tourism and private consumption. This faster recovery leads to a downward reassessment in GDP growth especially for 2023, and to a much lesser extent in 2024, also driven by a deterioration in the international environment and the effects of a higher inflation.

In 2022, both domestic demand and net exports are expected to contribute significantly to GDP growth, owing to relatively strong exports and private consumption growth. Price-mitigating fiscal measures continue to provide support to households and firms, as energy prices in Malta remain fixed. Hence, inflation, while significantly higher than target, remains below that in most euro area countries. Partly in view of this support, Malta is expected to avoid the recessionary pressures faced by some of its trading partners. 

Going forward, domestic demand is expected to be the main driver of growth as investment recovers and consumption remains relatively robust. The net export contribution is then expected to turn slightly negative but remain mildly positive in the other years, reflecting the gradual normalisation of tourism exports and growth in foreign demand more generally.

Employment growth in 2022 is expected to reach 4.9%, up from 2.9% in 2021. It is then projected to moderate to just above 2% by 2025. The unemployment rate is projected to decline to 3.0% this year, from 3.5% last year and it is expected to hover around this historical low over the outlook period.

In view of the increase in inflation this year, together with tight labour market conditions, wage growth is projected to be relatively strong. Nevertheless, nominal wage growth is forecast to remain below consumer price inflation this year due to some lag in the transmission from prices to wages. In later years wage growth is expected to remain robust and outpace consumer price inflation.

Annual inflation based on the Harmonised Index of Consumer Prices is projected to rise sharply in 2022 and remain high also in 2023. Indeed, it is envisaged to accelerate to 6.1% in 2022, from 0.7% in 2021. The sharp rise in inflation reflects a broad-based increase across all sub-components of the HICP, except for energy inflation. Import price pressures are expected to moderate somewhat by the beginning of next year, although these are envisaged to remain high by historical standards. HICP inflation is projected to moderate to 4.5% by 2023, driven by lower contributions from all subcomponents, excepting energy inflation, which is expected to remain unchanged throughout the projection horizon. Inflation is set to ease further in 2024 and 2025 to 2.3% and 2.0%, respectively.

The general government deficit is projected to recede to 5.6% of GDP in 2022, from 7.8% in 2021. It is expected to narrow further to 5.1% in 2023, 4.0% in 2024, and to 3.0% in 2025. This profile is driven by the unwinding of COVID-19 support measures in 2022, which offset outlays on price mitigation measures. The latter are set to remain in place but expected to diminish over the projection horizon in line with energy price assumptions. The general government debt-to-GDP ratio is projected to stand at just below 60% of GDP in 2025.

On balance, risks to economic activity are slightly to the downside in 2023 and more balanced thereafter. The main downside risks relate to the possibility of stronger than envisaged weakness in the international economic environment, which could lead to lower exports. Moreover, renewed pressure on commodity prices and higher imported inflation could adversely impact private consumption and corporate investment. Foreign demand may also be weaker than expected, especially if monetary policy in advanced economies continues to tighten more forcibly than assumed in this projection round. Unanticipated fiscal support measures, and a stronger increase in wages in the context of a very tight labour market, and thus continued labour hoarding, could however offer additional support to household consumption.

Risks to inflation are on the upside during the entire projection horizon. Indeed, further disruptions to Russian oil and gas supplies could increase commodity prices further, and would put further upward pressures on the prices of imported goods and transport costs. Finally, inflation persistence could be higher than anticipated in the baseline, and effects of pass-through from wages to prices could be stronger than assumed.

On the fiscal side, risks are on the downside (deficit-increasing) throughout the projection horizon. These mainly reflect the risk of higher-than-expected outlays on price mitigation measures and the likelihood of State Aid to the national airline.

This publication also includes three boxes. The first box estimates recent changes to the energy block in the Bank’s inflation projection model; the second box compares inflation developments in Malta with those in the euro area; and a third box expands on the impact from the Budget 2023 on the budget balance.

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