Malta’s economic growth remains among highest in EU despite inflation brake

Malta’s economic growth will moderate to 3.9% this year as high inflation erodes household disposable incomes and depresses consumption, according to the European Commission’s spring forecast.

Nonetheless, Malta’s GDP growth in 2023 is forecast to be the second highest in the EU. Ireland tops the list with a growth projection of 5.5%.

The Commission forecasts that GDP growth is set to reach 4.1% in 2024, supported by an increase in foreign labour.

The latest forecast comes in the aftermath of strong growth last year that topped 6.9%. Growth was fuelled by higher domestic demand and tourism, which “rebounded quickly and above earlier expectations”.

Deficit to decrease but remain relatively high

Malta’s deficit at 5.8% last year was among the highest in the EU as a result of government subsidies to keep energy and fuel prices unchanged.

The measures are expected to remain in place in 2023 and 2024 but the deficit is projected to decrease gradually over the two years because of “robust GDP growth” and lower expenditure on energy subsidies as a result of lower international prices.

The government deficit is expected to decrease from 5.8% of GDP in 2022 to 5.1% in 2023, remaining at a significant level. It is then set to decrease, albeit slowly, to 4.5% in 2024.

The Commission projects that energy subsidies will account for 1.7% of GDP in 2023, compared with 2.2% in 2022.

The deficit this year will also be impacted positively by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.8% of GDP in 2022.

The Commission also expects the phasing out of the national airline restructuring costs and the growth in the government wage bill remaining below nominal GDP growth to contribute to the reduction of the deficit.

Employment grows strongly

The Commission said Malta maintains “a high pace of employment growth”, which increased by an impressive 6% in 2022.

Demand for labour increased across various sectors of the economy, both public and private, and was especially strong in tourism and administrative services. The labour force is set to continue growing at a robust pace in 2023 and 2024 in line with population growth as the country continues to attract foreign workers.

Labour and skills shortages are expected to remain the main limiting factors for the Maltese economy over the forecast horizon. Malta’s unemployment rate fell to 2.9% in 2022 and is expected to remain around this level in 2023 and 2024.

Inflation to remain high despite unchanged energy prices

HICP inflation in 2022 reached 6.1%, even though the energy prices were fixed at 2020 levels by government intervention.

The Commission expects inflation in 2023 to stay high at 5.4%, pushed by increasing prices for imported goods (especially food), tourism services and housing maintenance services. In 2024, inflation is projected to slow to 2.8% as price growth in Malta’s main trade partners moderates.

Debt ratio to remain below 60%

The government debt-to-GDP ratio is set to increase to 54.8% in 2023 and reach 56.1% in 2024. Despite higher debt-to-GDP ratio it will remain below the target of 60%.