Central Bank estimates 2012 deficit at 2.7% of GDP

Malta's Central Bank has estimated the 2012 government deficit at 2.7% of GDP, in its annual report published a day after finance minister Edward Scicluna presented an updated statement of public finances for Budget 2012.

Scicluna yesterday said the 2012 budget was at 3.2%, risking Malta's entry into the excessive deficit procedure of the European Commission. But the Nationalist Opposition accused the minister of leaving out €66 million in levies owed by the national energy corporation Enemalta to the state, which have widened the shortfall between revenue and expenditure.

In its annual report, the Central Bank said the 2.7% deficit was expected to narrow slightly to 2.6% in 2013 and 2014. The improvement will be driven by controlled government spending, especially in salaries and retirement pensions

Debt on the other hand will increase, albeit at a slower pace to 72.9% in 2013 from 72.1% in 2012, partly as a result of increased borrowing associated with EU commitments to extend financial support to euro area countries experiencing financing problems.

"The projections have been prepared against a backdrop of high uncertainty in the international economic and financial environment, particularly where the euro area is concerned," the CBM said.

"The fragile situation in the euro area and the possibility that demand in Malta's main trading partners turns out to be weaker than expected remains a negative risk, which would weigh on external demand. On the other hand, export growth may accelerate if the ongoing expansion of the business and financial service sectors is maintained and extended into new export markets."

Economic growth

Compared with the bank's previous projection exercise, which was concluded in November 2012, the latest exercise foresees a stronger acceleration in 2013.

Real GDP growth is expected to accelerate from 0.8% in 2012 to 1.4% in 2013, to 1.8% in 2014. The bank expects growth to be driven by private consumption, as well as government investment that will boost activity in 2013. Net exports are foreseen to expand over the projection horizon, although at a more moderate pace compared with 2012.

After having dropped by 0.6% in 2012, private consumption is set to increase by 1.0% in 2013 and by 1.8% in 2014. Specifically, the cuts in income tax for higher earners are believed will increase private consumption.

Government investment is set to contract slightly in 2014, owing to the envisaged completion of the Valletta City Gate project in 2013, and to lower expenditure in the energy sector. Moreover, real government investment rose strongly in 2012, when a critical mass of infrastructure projects was under way, but is foreseen to grow more moderately in 2013 and again in 2014.

Wages and job growth

Following relatively strong growth in ULCs observed in 2012, which arose as both employment and average employee compensation outpaced real GDP growth,

Firms are expected to take a more cautious attitude towards recruitment in 2013 and 2014 due to an increase in unit labour costs arising from wages rising above real GDP growth.

Overall employment growth is expected to moderate in 2013, before edging up marginally in 2014. In turn, the unemployment rate is expected to increase slightly, from 6.5% in 2012 to 6.6% in 2013 and 2014.

Productivity is set to pick up slightly in 2013, and to increase further in 2014. This reflects stronger growth in activity than in employment. After the relatively rapid rise in 2012, nominal compensation per employee is set to moderate in 2013, but should recover in 2014 in response to the improvement in productivity foreseen over the projection horizon.

ULC growth is expected to ease in 2013, mainly owing to the projected easing in wage growth that year. However, it is set to accelerate again in 2014, as the recovery in productivity is expected to be weaker than the rise in compensation per employee.