Malta: EC forecasts strong economic growth in 2022

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Malta’s economy is set to see a robust recovery in 2021 and to continue on a stable growth path in 2022 and 2023, the European Economic Forecast for Autumn said. Growth is expected to be driven by a recovery in domestic demand with the contribution of net export turning positive in 2022 and 2023. Given the supportive fiscal policy stance, the general government deficit is projected to widen further in 2021 before decreasing in the next two years following robust economic growth and a winding-down of fiscal support measures.

This forecast is in line with the EC’s general outlook for the Union, with the report noting that as vaccination campaigns progressed and restrictions started to be lifted, growth resumed in spring and continued unabated through summer, underpinned by the re-opening of the economy.

After a deep fall in GDP in 2020 due to the pressure of COVID-19 pandemic related restrictions and to the drop in international
tourism, the Maltese economy is set to return on a robust growth path, the Commission found.

In 2021, real GDP growth is forecast to reach 5.0%, mainly driven by domestic consumption and investment. Tourism is set to gain some ground, but to remain well below the 2019 level. Strong government expenditure continues to support the economy, including via public investment. In the coming years, following the unfolding recovery in the world economy, the growth contributions of net exports and investment are projected to grow.

Growth is set to peak at 6.2% in 2022 when the contribution of net exports is to become positive, counting on further relaxation of international travel requirements and a strong recovery in tourism. The economy is projected to reach the pre-crisis level in the second half of 2022. This level is the highest forecasted for EU Member States.

Further on, growth is forecast to decrease to a still robust 4.8% in 2023.

The Commission however noted a possible downside risk related to the decision of the Financial Action Task Force (an intergovernmental body against money laundering) to grey-list Malta.

With both exports and imports growing, the current account balance is expected to remain positive and increasing towards 2022 and 2023.

Employment growth to be sustained

The impact of the crisis on the labour market was successfully countered by public support measures, the forecast found.
Employment grew by 2.7% in 2020, as the wage support scheme also fostered regularisation in the labour market. Employment is expected to
continue to increase over the forecast horizon, although at a slower pace. The growth in employment is most prominent in the public
sector, professional services, and construction. This positive labour market dynamics have already led to labour shortages being reported by firms in
the above and other sectors. However, shortages are expected to relax gradually as of 2022, with improving cross-border mobility. Malta’s
unemployment rate is set to gradually decrease over the forecast horizon, from 4.3% in 2020 to 3.7% in 2023.

Inflation to increase at back of international energy prices

The cost of living is expected to reach 1.1% in 2021, still being moderate and reflecting only to a limited extent the recent increase in international energy prices, given that large part of the country’s energy purchases, such as natural gas for electricity generation, are governed by medium-term contracts. In 2022, inflation is set to rise to 1.6% driven by growing domestic demand, demand for tourism services and delayed effects of increased
energy prices that will start to materialise in the second half of the year. As the pace of economic growth persists into 2023, inflation is set to remain broadly stable at about 1.5%.

Increase in government deficit is set to gradually correct

The government deficit is expected to increase to over 11% of GDP in 2021. The increase in public expenditure related to pandemic-related stimulus measures is the main factor contributing to this increase in the deficit. In 2021 Malta maintained and extended a number of important measures, such as the wage support scheme, a voucher scheme to support the hospitality and retail sectors, utility and rent subsidies for businesses, and healthcare-related expenditures. After a decline in 2020, the tax revenues are set to increase again in 2021. On the back of the economic recovery, the corporate tax revenues improved. Supported by government measures and the relatively good performance of the labour market, revenue from social contributions continued to increase. As the economy continues to grow and economic support measures are wound down, the deficit is projected to decline to 5.8% of GDP in 2022 and 4.7% in 2023. As a result of ongoing primary deficits, the government debt-to-GDP ratio is
forecast to increase to 61.4% in 2021 and reach 63.6% in 2023. The forecast also incorporates expenditures financed by RRF grants for a cumulative amount of 1.2% of 2019 GDP over the forecast horizon.

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