Central Bank projections: reduced growth in 2012, picking up in 2013

Labour and wages | Deficit | Inflation

The Central Bank's latest economic projections put 2013 as the year economic growth picks up again, but 2012 will see real growth slowing down after 2011's slowdown.

With exports remaining weak, Malta's economic expansion this year and the next is forecast to be driven by domestic demand.

At the very least, inflation is expected to decline in 2012, and ease further in 2013 on account of a drop in international oil prices.

Government's reduced spending in capital projects appears conspicuous in the Central Bank report, which said this will contribute to the decrease in economic growth of 1.6% in 2012, befoe picking up to 2% in 2013.

"In both years growth in economic activity is expected to be propelled by domestic demand, initially through a recovery in gross fixed capital formation and, subsequently, by a rebound in private consumption."

The bank also said government investment is expected to slow down in 2012, before contracting slightly in 2013.

It is unclear whether the Central Bank is referring to the €80 million spend on the City Gate project or the €30 million Life Sciences park as the underpinning for the growth in private investment in 2012: "Private investment growth is expected to be supported by progress on a major construction project, but the underlying determinant of its gradual recovery is expected to be increased spending on machinery and equipment."

The Central Bank said the main risk to the economy remains the eurozone's debt crisis. "While the Maltese economy's growing diversification has underpinned its recent high degree of resilience, the economic situation in the euro area poses downside risks, should activity contract by more than is currently foreseen."

If demand for exports does not pick up, a weakening of the euro could however boost Malta's exports to non-euro area trading partners.

A resolution of the euro crisis on the other hand, would improve business and consumer sentiment, and in turn Malta's exports.

Labour and wages

The deterioration in external demand will be felt on a slowdown in job growth in 2012, before picking up in 2013 with the unemployment rate forecasted to edge down to close to 6%.

"This is consistent with an anticipated deceleration in labour supply growth, as the overall working age population is projected to start declining over the forecast horizon. The impact of this on the labour supply is being countered by a steady rise in female participation in the labour market," the Central Bank says in its report.

Meanwhile, salaries are expected to recover gradually in 2013, but unit labour costs will be kept down as employers insist on greater productivity that reflects wage growth.

Deficit

Having fallen below the 3% of GDP threshold in 2011, the general government deficit-to-GDP ratio is forecast to decline further in 2012 and to remain stable in 2013.

"An expansion of government investment in the infrastructure is largely expected to be co-financed from EU funds. Faster growth in revenue, particularly indirect taxes, is also expected to contribute to a narrowing of the fiscal deficit over the projection horizon."

The Central Bank echoed statements by finance minister Tonio Fenech on Monday that the increase in national debt to 72% of GDP partly reflected additional borrowing to finance a loan to Greece in coordination with other European Union member states.

Inflation

After rising to 2.4% in 2011 mainly in response to hikes in prices of food and, to a lesser degree, of industrial goods, annual average HICP inflation is projected to decelerate to 1.9% in 2012.

In contrast, inflation in the services sector is set to pick up slightly, as part of the increase in input costs, namely food and energy prices, observed in 2011 is expected to be passed on to consumers. In 2013 inflation is forecast to drop further, to 1.6%, since it is envisaged that slower annual growth in prices of processed food and energy will more than offset a marginal increase in prices of industrial goods.