Central Bank lowers growth projection, warns of ‘additional measures’ to reach deficit targets

As Prime Minister Lawrence Gonzi struggles to keep his government in office, at least until November's Budget, the Central Bank's Quartely Review published today has dealt another blow to his prospects of fighting an electoral campaign based on the economy.

While Gonzi reiterated his focus on ensuring growth to protect existing jobs, the Central Bank reviewed growth projections from 1.6% to 1.4% for 2012, but is also projecting a recovery in 2013 with a growth rate of 2.2%.

The Central Bank said that exports, consumption and investment are the key to Malta's growth prospects, and are all factors which pose risks to the growth projections, which are judged "to be on the downside, particularly for 2012," largely as a result of uncertainty surrounding the sovereign debt crisis in the euro area.

"It remains important to increase productivity and to enhance the local economy's growth potential. This requires ongoing investment in infrastructure, education and manpower training. At the same time, banks should continue to keep adequate levels of capital and liquidity, a diverse mix of funding sources and a prudent provisioning policy. This will enable the financial sector to keep channelling savings into productive investment," the Central Bank said.

Inflation also poses a risk to the Maltese economy with average HICP inflation projected to increase from 2.5% in 2011, to 2.7% in 2012, before falling to 1.9% next year.

General government deficit is expected to narrow further this year, according to the recent Stability Programme, however the Central Bank's report states that although quarterly budgetary data may be volatile and one-off factors played a part, "the widening of the deficit during the first quarter of the year poses risks to the achievement of this aim."

The Central Bank warned that "additional fiscal consolidation measures may need to be taken to ensure that the deficit target for 2012 is achieved. A more ambitious fiscal consolidation effort would also help place the debt ratio on a downward path."

Outlook

After their holidays spent soaking up the August sun, European political leaders are said to be bracing themselves for storm clouds this Autumn.

The latest economic figures show that Europe is edging closer to recession, dragged down by the crippling debt problems of the 17 countries that use the euro.

These debt troubles have tormented the eurozone for close to three years and so far have defied leaders' efforts to fix them. And the longer they take to resolve, the bigger they get.

Leaders from France, Germany and Greece all meet later on this week in the latest round of shuttle diplomacy to attempt to put a lid on the eurozone's debt crisis.

Malta is considered to be among the six eurozone countries, which include Greece, Spain, Italy, Cyprus and Portugal who are already in recession, and others look feeble.

Europe's stumbling economy is hurting recovery in other parts of the world.

The eurozone has already provided billions in loans and financial aid to keep Greece, Ireland and Portugal from defaulting on their debts. And now markets are worried that recession-hit Spain and Italy could soon be asking for assistance.

Meanwhile, public anger over austerity measures and unemployment is spreading, and a key court ruling on the eurozone's crucial new bailout fund is due in Germany.