Yet another upward revision for Malta’s economic prospects

After the IMF and the European Commission, the Central Bank of Malta is the third institution to revise upwards its economic forecasts for Malta.

In their latest forecasts, Central Bank experts contend that despite developments in recent months, including the introduction of new restrictions on tourism, Malta next year will exceed its pre-pandemic level of national output. Since the Central Bank’s projections for tourism are nowhere near 2019 record activity levels, this implies that the rest of the economy will be well above its pre-pandemic level.

While there are some externally-oriented sectors that are growing strongly, the broader economic recovery is expected to be driven principally by domestic demand. This is due to two factors affecting domestic demand: the strong financial position of households; and the success of the vaccination programme. Both factors are boosting consumer confidence to unprecedented levels. This explains for instance, the huge boom in property purchases, particularly in Gozo and other traditional second-home localities like Marsascala, Mellieha and St Paul’s Bay.

The Central Bank expects economic growth to exceed 5% in 2021, and almost reach 6% next year.  If this forecast for next year occurs it would mark the highest growth rate in five years. The Central Bank is by no means known to be amongst the most optimistic forecasters. By their own account, they document in their report how their forecasts fall within the average of the forecasts being made by other institutions.

If this forecast for next year occurs it would mark the highest growth rate in five years.

In earlier assessments the Bank had also noted that its projections show “a downward bias”. This irrespective of the fact that Malta’s national accounts are also notoriously prone to have a downward bias, with GDP being revised upwards on average by close to one percentage point, some quarters after the initial data release. If one takes all this into consideration, the forecast by the Central Bank of close to 6% GDP growth for 2022, is likely to mean that actual GDP growth may be more in the range of 8%.

Irrespective of these considerations, the forecasts made by the Central Bank make for interesting reading. They indicate that investment will grow by 10%, followed by 8% growth next year. This is partly due to public expenditure, but mostly relate to private investment. That firms, which many had thought would be going bankrupt due to COVID, are on the verge of such a splurge in investment is astounding.

An important element behind this recovery is the anticipation that Maltese and Gozitan families are bound to increase their consumption very strongly. This is because in recent months they have saved record amounts, which they will now spend as the uncertainty caused by the pandemic has diminished.

The spending needed to furnish the record amount of second homes being purchased should not be underestimated. In addition, exporting companies are starting to see an improvement in external demand and are therefore feeling the need to invest more.

Maltese and Gozitan families are bound to increase their consumption very strongly.

A key factor behind driving domestic demand is the excellent employment situation. Malta was indeed one of the few countries in Europe where employment increased instead of declined in 2020. This is expected to continue in the coming years. So much so that the unemployment rate by 2023 is expected to fall to 3.5%. This would be the lowest unemployment rate in the history of our country. At the same time that unemployment is projected to fall, wages are expected to consistently rise at higher rates than inflation.

The pace of the economic recovery means that the state of government finances is set to improve, without the need for austerity or new taxes. While Government is still forecasting a rise in the deficit this year, the Central Bank disagrees and forecasts a lower deficit. Similarly, while Government is forecasting a gradual fall in the deficit in subsequent years, the Central Bank thinks that by 2023 it will be just over one third of the one observed in 2020. In addition, the national debt burden is expected to remain below the rate of 64% of national wealth, among the lowest in the Euro area, and even below the 2013 level.

So, at the end of the most pronounced economic shock in our nation’s history we will have unemployment and a public debt burden far less than that left behind by previous administrations.

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