Subdued 2012 for Malta – EU forecast

The European Union says Malta's real economic growth is forecast to decelerate to 1% in 2012, compared to the 1.3% projected in an earlier forecast in 2011, as the euro area's slowdown further impacts the island's growth prospects.

The latest forecast from Brussels has echoed warnings from Moody's credit rating agency and the International Monetary Fund, specifically over the worsening property market in Malta and the effects this can have on the quality of the banks' credit portfolio.

The forecast pointed out that downside risks could possible impact the banks from the "already elevated share" of non-performing loans and high exposure to the real estate sector.

Additionally, Malta's trade can be hit by a drop in demand because of its heavy reliance of the tourist sector from the eurozone countries.

Elsewhere, some of the forecast's predictions make for sombre reading:

"The outlook for 2012 is relatively subdued. The latest consumer confidence indicators suggest that private consumption will remain weak. Households' disposable income is expected to be squeezed by a significant deterioration in labour market conditions after the very strong employment gains recorded in 2011, while average wage growth is foreseen to remain below HICP inflation.

"Uncertainties about the domestic and international economic environment, coupled with cautious lending behaviour by banks, are likely to continue to dampen business investment, which is likely to contract for a second consecutive year."

While domestic demand will be a modest contributor towards real GDP growth, Malta's net exports will benefit from a relatively high share of trade with emerging markets, and also outpace the growth of imports due to the weak domestic demand for such imported goods.

The Maltese economy rebounded relatively strongly in 2011, after a mild contraction in real GDP in 2009, thanks to buoyant private consumption, healthy job creation and wage growth, as well as a strong performance by the tourist sector.

In the second half of 2011, however, the economy gradually lost steam. Private consumption growth slowed considerably in the third quarter, while annual export growth in volume terms turned negative for the first time since late 2009.

The downward trend is expected to have continued in the final quarter of 2011, in line with the general slowdown in the euro area. Real GDP growth for 2011 as a whole is estimated at 2.1%, almost exclusively driven by net exports; this is unchanged from the autumn 2011 forecast.

Annual household consumer price inflation moderated in 2011, and in 2012 energy inflation is expected to decelerate significantly given the more moderate assumed growth in oil prices compared to 2011, coupled with the government's decision to keep utility tariffs unchanged for a second consecutive year.