Edward Scicluna warns of risks from prolonged war in Ukraine

Domestic consumption could be impacted negatively if commodity prices remain elevated for a prolonged period as a result of the Ukraine war, Edward Scicluna said.

The Central Bank of Malta governor said on Wednesday that the negative impact could be mitigated by “further fiscal support or a faster decline in the savings ratio”.

Scicluna said prolonged geopolitical tensions in Europe could also lead to higher imported inflation than envisaged by the European Central Bank.

He was speaking during the launch of the CBM’s annual report for 2021, which showed how the economy grew by 9.4% last year as it recovered from the effects of the COVID-19 pandemic. The increase in GDP was marginally above that of 2019.

Scicluna said the CBM’s latest projections show that economic activity levels are expected to continue recovering in 2022.

“As economic activity levels have already returned to those prevailing before the pandemic, growth is expected to moderate to more normal levels,” he said. The CBM expects GDP will grow by 6% in 2022, 5.3% in 2023 and 3.8% in 2024.

Scicluna said inflationary pressures are expected to remain elevated but should begin to dissipate in 2023, as supply bottlenecks disappear.

However, he noted that the Russian invasion of Ukraine has heightened uncertainty and represents additional downside risks to economic activity.

Economy recovered to pre-pandemic levels in 2021

The annual report said that the global economy began to recover from the effects of the pandemic in 2021 but the recovery remained uneven across sectors and countries.

The strong rebound in global demand occurred in the context of bottlenecks caused by disruptions in production and supply. Mismatches between supply and demand in turn led to higher inflationary pressures that were amplified by rising energy prices.

Employment in Malta continued to benefit from the ongoing normalisation of economic activity in a tight labour market and from COVID-related support measures, particularly the wage supplement scheme. Unemployment fell and stood well below its average since at least 2003.

The fiscal balance remained strongly in deficit, due to the extension of economic support and health expenditure. The current account balance also remained in deficit, reflecting a significant increase in imports which included the aviation sector. Tourism-related earnings, while recovering, remained well below pre-pandemic levels.

The annual rate of inflation based on the harmonised index of consumer prices (HICP) fell slightly to 0.7% in 2021. However, by the end of the year inflation had risen to 2.6% as international price pressures affected the Maltese economy.

But inflation remained well below that in the euro area, mainly as a result of the surge in international commodity prices.