by Keith Zahra
INFLATION AND ENERGY WORRIES CAST A DARK SHADOW ON STRONG ECONOMIC PERFORMANCE
The staggering increase in the cost of living has been the economic talking point of the past weeks in Malta. While food prices continue to hit families hard, Government has sought to cushion energy prices, increasing its subsidies and putting further pressure on the country’s fiscal position.
Notwithstanding the economic turbulence generated by the war on our continent and the indirect effect of the heavy sanctions imposed on Russia, the Maltese economy continued to enjoy a healthy growth rate. GDP growth is forecasted by the European Commission to reach 4.9% this year, which is higher than that projected in spring.
Despite the undeniable effects of the war in Ukraine, strong domestic consumption and net exports continue to push the economy forward. The export of tourism services is on course to a very rapid rebound in 2022 with full recovery expected by 2023, contributing to growth in both years. In 2023, real GDP is forecast to increase at a slower pace, but still by a robust 3.8%, affected by a general economic slowdown of its main trading partners, but partially compensated by the continued growth of tourism and other services exports.
In June 2022, Malta was removed by the Financial Action Task Force from the list of jurisdictions under increased monitoring (grey-listing). This positive outcome is expected to reduce the uncertainty associated with investment.
This decision is likely to have also contributed Malta to maintaining its A- rating with a stable outlook provided by the Fitch rating agency, despite the surrounding challenges. In a report published in September, the agency acknowledged that adverse effects from the geo-political situation in our continent are inevitable but argued that the slowdown was unlikely to hurt the economy due to the injection of a significant amount of EU funds and fiscal prudence.
SERVICES MAJOR CONTRIBUTOR TO GROWTH
Estimates released by the NSO indicate that the Gross Domestic Product (GDP) for the second quarter of 2022 amounted to €4,100.4 million, registering an increase of €526.6 million, or 14.7%, when compared to the same quarter of 2021. In volume terms, GDP rose by 8.9%.
A strong surge in services was behind a strong rebound in economic activity, contributing to 8.8%. On the other hand, the improvement in the industry was marginal, with a 0.4% growth. Focusing on the services sector, the major contributors were accommodation and food services activities, ICT, transport and retail trade. Tourism certainly played its part over Summer with a t total of 712,122 passengers travelling through Malta International Airport in August, marking a recovery of 86.5 per cent of pre-pandemic traffic. The seat load factor (SLF), measuring the occupancy of the seats available on flights operated to and from Malta, reached an all-time high of 90.4%, translating to an increase of 2.4 % compared to August 2019.
In June, the volume of retail trade – which the Central Bank of Malta describes as a short-term indicator of final domestic demand – increased by 8.2% in year-on-year terms, after rising by 9.3% in May.
IMPORTS AND EXPORTS INCREASE
During the first seven months of the year, the total trade in goods deficit widened by €995 million when compared to the corresponding period of 2021, reaching €2,829.9 million. Imports and exports increased by €1,310.2 million and €315.2 million, respectively, amounting to €5,129.4 million and €2,299.5 million.
INFLATION IS A BIG WORRY
Despite the supply-side challenges which had already been impacting international markets, inflation in 2021 increased only moderately by 0.7% as energy prices were kept unchanged by state interventions and hedging contracts for gas supply. While the authorities have committed to continue limiting energy price growth in 2022, the strong increase in inflation in the first two quarters of 2022 indicates that rising international energy and commodity prices are affecting Malta’s prices indirectly.
Inflation this year is set to rise to 5.6%. The increases in food, transport and imported goods prices, and a continued recovery in the tourism and hospitality services are set to drive up price pressures also in 2023, with inflation remaining elevated at 3.3%. This is despite the continued flow of government subsidies, which are costing the public offers close to half a million euros.
In July 2022, the annual rate of inflation as measured by the HICP was 6.8%, up from 6.1%. The 12-month moving average rate for July stood at 3.7 %. The largest upward impact on annual inflation was measured in the Food and non-alcoholic beverages Index (+2%).
Despite the strong economic performance, large pockets continue to struggle. In 2021, respondents to an NSO standard-of-living survey who said that their household was in arrears on mortgage or rent payments, utility bills, hire purchase instalments or other loan payments, and respondents who said that they found it difficult to keep the home adequately warm in winter, had the highest increase when compared to the previous year. At 20.3%, the at-risk-of-poverty or social exclusion rate (AROPE) increased by 0.4% when compared to that derived from the 2020 survey. The AROPE reveals the share of persons who are either at risk of poverty, severely materially deprived or residing in a household with low work intensity.
A STRONG JOB MARKET
Despite the inflationary challenges, the employment market remains a strong one with many employers and industrial sectors lamenting the difficulties in finding and keeping talent. In July 2022, the number of persons registering for work stood at 925 decreasing by 617 when compared to the corresponding month in 2021. Data provided by Jobsplus for July 2022 indicate a year-on-year decrease of 580 persons registering under Part I, and an additional drop of 37 persons registering under Part II of the unemployment register. The largest share of males and females on the unemployment register sought occupations as clerical support workers. The seasonally-adjusted unemployment rate stood at 3.0% in June 2022, marginally lower than a month earlier, and below the rate of 3.5% registered in June 2021. The rate observed in June 2022 was also the lowest rate ever recorded.
DEFICIT AND DEBT LEVELS INCREASE
By the end of July 2022, the Government’s Consolidated Fund reported a deficit of €514.9 million. In parallel, debt levels have gone up to €8.5 billion, an increase of €709.4 million from 2021.
The increased deficit resulted from an increased discrepancy between revenue and expenditure. In the first seven months of 2022, Recurrent Revenue amounted to €3,014.5 million, 14.7 per cent higher than the €2,627.7 million reported a year earlier. The largest increase was recorded under Value Added Tax (€130.4 million), followed by Income Tax (€120.4 million) and Social Security (€74.2 million).
Total expenditure stood at €3,529.3 million, 0.6 per cent higher than the previous year. During the reference period, Recurrent Expenditure totalled €3,113.1 million, an increase of €36.5 million in comparison to the €3,076.6 million reported in the first seven months of 2021. The main contributor to this increase was a €41.9 million increase reported under Programmes and Initiatives.
At the end of July 2022, Central Government debt stood at €8,557.8 million, an increase of €709.4 million from 2021. The increase reported under Malta Government Stocks (€569.0 million) was the main contributor to the rise in debt. Government ministries and entities have reportedly been ordered to save about €200 million by cutting down on administrative costs.
Looking ahead: Be wary of second-round effects
According to the Fitch credit rating agency, the economy will still grow by around 4% this year, with the agency noting that the economy may struggle next year due to the second-round effects of the war and the waning of the post-pandemic effect. Fitch is forecasting Malta’s GDP growth to drop to 2.7% next year, which is still significantly higher than the 1.9% predicted for the wider European Union.
These forecasts take a more conservative stance than those of the Central Bank of Malta, which in June anticipated GDP to grow by 5.4% in 2022, 4.9% in 2023 and 3.8% in 2024. These projections anticipate that more persistent supply bottlenecks as well as higher input and transport costs could adversely affect manufacturing output, private consumption, and investment. The Bank also noted the risks of a a larger deficit in 2022 and 2023. These mostly reflect the likelihood of additional Government support to mitigate rising commodity prices and State aid to Air Malta.
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