MALTA ECONOMIC REVIEW
Services, industry propel strong economic growth as construction stutters
Despite the persistent economic challenges emanating particularly from the prolonged war in Ukraine and the subsequent energy crisis, Malta’s growth levels remained stong in 2022, with real GDP estimated to have reached 6.9%, which is higher than projected in autumn. The economy showed strong growth in both private and public consumption. In addition to strong performance by the services sectors in general, the export of tourism services in 2022 rebounded quickly, both in terms of total number of visitors and tourism expenditures, contributing to overall positive economic results.
Gross Domestic Product (GDP) for 2022 amounted to €16,870.3 million, registering an increase of €1,868.4 million, or 12.5 per cent compared to 2021. In volume terms, GDP rose by 6.9 per cent. This is considered one of the highest growth rates in the eurozone, which according to a first estimation of annual growth for 2022, based on seasonally and calendar adjusted quarterly data, registered an increase of 3.5%.
The drivers behind this growth were services and industry, which contributed to the lion’s share of growth. Conversely, construction had a negative contribution of 0.3 percentage points. Compared to last year, Service activities increased by 9%, industry by 7.6%, whereas Construction dropped by 7.0%.
Breaking down the service sector, the NSO noted that the biggest increases took place within accommodation and food service activities (81.4%), transportation and storage (23.3%), administrative and support services activities (15.8%), information and communication (7.9%), and wholesale and retail trade (7.7 %).
The contribution of domestic demand to the year-on-year GDP growth rate in volume terms was 10.9 percentage points, of which 4.7% were due to Final consumption expenditure and 6.1% to Gross capital formation. External demand registered a negative contribution of 4.0 percentage points, with 10.8 percentage points attributable to exports and 14.8 percentage points explained by imports. Visitor numbers to Malta reached 2.3 million last year. This figure exceeds some 83% of the pre-pandemic total and their busiest ever.
Separate NSO data has confirmed a relatively slower performance in the property industry. In the fourth quarter of 2022, 3,738 final deeds of sale were registered, an annual decrease of 4.1 per cent. The value of the deeds registered during this period went up by 0.1 per cent over the same quarter of the previous year and amounted to €859.3 million. In December 2022, 1,002 promise of sale agreements relating to residential property were registered, equivalent to a 55.9 per cent decrease over the previous year. Lobbyists for the construction sector sought to explain this drop by making reference to one-off schemes which had inflated numbers the year before.
Malta’s job market remains a strong and stable one, with NSO data showing that as of February 2023, the unemployment rate stood at 3.0 per cent, at par with the previous month and down by 0.1 percentage points from February 2022. During February 2023, the number of unemployed persons was 8,977, with males and the 25 to 74 age group being the major contributors to the overall level of unemployment. The seasonally adjusted number of unemployed youths amounted to 2,751, whereas those aged between 25 and 74 years stood at 6,226.
On the other hand, inflation remains a sore point for the economy. In January 2023, the annual rate of inflation as measured by the HICP was 6.8 per cent, down from 7.3 per cent in December 2022. The 12-month moving average rate for January stood at 6.3 per cent. In January 2023, the largest upward impact on annual inflation was registered in the Food and non-alcoholic beverages Index (+2.13 percentage points), largely due to higher prices of meat. The second and third largest impacts were measured in the Housing, water, electricity, gas and other fuels Index (+0.93 percentage points) and the Restaurants and Hotels Index (+0.86 percentage points), mainly on account of higher prices of house maintenance services and restaurant services, respectively.
Possibly a result of the inflationary impact, the number of part-timers who held both a full-time and part-time job increased by 11% in just a year. The number of persons who also held a full-time job at the end of August 2022 amounted to 38,541, an increase of 10.9 per cent when compared to the corresponding month in 2021. Employed persons whose part-time job was their primary occupation totalled 35,844, up by 5.9 per cent when compared to the same month in 2021.
During 2022, Malta reported a wider rade deficit, despite an increase in exports. Imports and exports increased by €2,582.7 million and €939.9 million, respectively, amounting to €9,254.5 million and €4,501.3 million. Higher imports were mainly recorded in fuels, lubricants and related materials (€1,070.4 million), machinery and transport equipment (€924.3 million), food (€190.0 million), chemicals (€135.9 million), semi-manufactured goods (€121.9 million), and oher manufactured articles (€104.7 million). On the exports side, the main increases were registered in machinery and transport equipment (€379.4 million), fuels, lubricants and related materials (€359.5 million), food (€129.8 million) and other manufactured articles (€52.5 million), and semi-manufactured goods (€45.8 million).
Finances deeper in red
Despite the healthy economic position, the continuation of energy subsidies and further increases in recurrent expenditure has pushed the state coffers further into the red. At the end of February 2023, Central Government debt stood at €9,280.3 million, an increase of €886.4 million when compared to 2022. The increase reported under Malta Government Stocks (€781.2 million) was the main contributor to the rise in debt. Higher debt was also reported under Treasury Bills (€237.5 million).
A recent report by the credit rating agency Fitch estimates that Malta’s fiscal deficit narrowed to 5.8% of GDP in 2022 from 7.5% in 2021. The general government debt ratio is estimated to have decreased in 2022 and will likely continue to increase progressively over the rest of the forecast horizon, stabilising at around 58.0% by 2025. While sizeable energy and food subsidies weighed on the budget balance year, these were offset by the government’s ad-hoc spending review during the summer and the continued phasing out of Covid-19 expenditure. Adding to these concerns, he Government has presented another bailout package for state-owned airline Air Malta, and although the total cost of any state aid to the airline remains unknown, a budgetary impact cannot be excluded.
Over and above, the European Commission has referred Malta to the European Court of Justice due to concerns over its Citizenship by Direct Investment Programme, which could result in a revenue loss between 0.3% and 0.4% of GDP annually. Although the same credit rate agency confirmed Malta’s A+ stable rating, it did highlight the downside risk to this classification in connection with Malta’s fiscal position, particularly in case of a continued upward trend in general government debt, for example, due to a more prolonged period of energy-related subsidies, weaker growth prospects or loss of key sources of revenues. It, therefore, comes to no surprise that the Finance Minister has in recent weeks, referred to the need for action to shore up Malta’s financial position once again.
Growth rate to be halved in 2023
According to the European Commission’s forecast, in 2023, Malta’s real GDP is forecast to grow at a slower pace, by 3.1%, following a wider economic slowdown in Malta’s main trading partners. The Central Bank of Malta projects a slightly more optimistic forecast, with a 3.7% growth in 2023. The latter suggests that domestic demand is expected to be the main driver of growth as investment begins to recover after last year’s contraction, while consumption is expected to remain relatively robust.
The net export contribution is expected to be marginal in 2023, as exports should grow at a significantly slower rate following the strong rebound seen in 2022. Although the contribution of net exports is set to edge up slightly in 2024 and 2025, domestic demand is then expected to remain the main driver of growth in those years.
However, as in many countries around the globe, inflation remains a significant concern. HICP inflation in 2022 reached 6.1% despite energy prices being kept at 2020 levels following an extension of government subsidies. EU forecasts indicate that inflation in 2023 is set to remain elevated at 4.3% due to continuing pressures in food, transport, and imported goods prices. In 2024, inflation is expected to subside to 2.4% as imported price pressures are also set to moderate.
In its latest assessment, the Central Bank opined that risks to economic activity are slightly tilted to the downside in 2023 and more balanced thereafter. It sees the key downside risks as emanating from the possibility of stronger than envisaged weakness in the international economic environment, which could lead to lower exports. Foreign demand may also be weaker than expected, especially if the monetary policy in advanced economies tightens more forcibly than assumed in this projection round. Some of these risks could be mitigated by stronger than expected wage growth, which could offer additional support to household consumption.
Key references
National Statistics Office (Malta)
Central Bank of Malta Forecast – 2022-2025
Central Bank of Malta – Quarter Review (Q1-2023)
European Commission Winter Forecast (February 2023)
Fitch Credit Rating Report for Malta (March 2023)
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