Commission forecasts lower deficit, more growth for 2014-15

An economic forecast for winter by the European Commission is expecting an average growth of 2.1% in real GDP in 2014-15, with labour market participation set to remain on an upward path thanks to higher activity by women and older workers.

From 3.3% of GDP in 2012, the budget deficit was expected to decrease to 3% of GDP in 2013. Current primary expenditure relative to GDP is forecast to increase by 0.5 percentage points, despite the spending review at ministry level that started in July 2013.

In 2013, inflation came in slightly below expectations at 1% for the year as a whole in 2013, slowing down from 3.2% in 2012 - thanks to reductions at restaurants and hotels.

In 2014, the reduction in electricity tariffs is projected to offset a rebound in services inflation and keep overall price inflation at a relatively moderate by Malta's historical standards 1.2%. The HICP is forecast to accelerate further to 1.9% in 2015, above the euro-area average.

The EC said indirect taxes would increase by 0.3 points of GDP, driven by greater private consumption and corporate profitability. A "favourable labour market outlook" was expected to drive income taxes, despite the tax cuts over the next years, while the stabilization of the deficit would also be made possible from the sale of citizenship to foreign individuals.

Recruitment restrictions are expected to keep spending stable, with a deficit of 2.7% for 2015.

The debt-to-GDP ratio is projected to reach 72.4% in 2014 and decrease to 71.5% in 2015, following the due repayment of part of a loan from Air Malta.

Downside risks relate to the financial situation of Enemalta, as well as higher than budgeted disbursement related to the car VAT refund scheme.

Components

Real GDP growth was relatively strong in the first three quarters of 2013 due to inventories in national accounts.

But gains in household consumption were offset by a decline in investment activity, which is estimated to have contracted for the third consecutive year.

A decline in exports was milder than that in imports, so external trade was seen to have had a slightly positive contribution to growth.

Favourable labour market conditions and the positive impact of the announced reduction of electricity tariffs are projected to support a further improvement in household consumption.

Structural reforms that the government has committed to enact in the energy sector could lower costs for the economy and boost domestic demand, constituting an upside risk, particularly in 2015.