Eurozone EY Eurozone Forecast June 2014 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Malta Growth of 1.8% in 2014, as EU presses for deficit cut Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights Malta s GDP is forecast to grow 1.8% in 2014. This is still above the Eurozone average, but down from 2.4% last year, due to a sharp drop in public consumption as the fiscal deficit is reined in under plans agreed with the European Union (EU). Growth is expected to stay close to 1.8% in 2015 18, largely driven by investment. A sharp recovery in net exports will support growth this year, but import growth is forecast to climb back to match export growth in 2015, and then to overtake it. The services sectors will continue to outgrow industry, with tourism and financial services being the major sources of demand growth. Tourism will boost the revival of private consumption in 2014 15, but will also be accompanied by the re-acceleration of import growth above export growth, as consumer imports prove hard to substitute. GDP growth 2014 1. 8% GDP growth 1. 7% Inflation is expected to pick up gradually after the sharp fall to 1% in 2013, but is forecast to stay below 2% until 2017. Closer alignment to the Eurozone average reflects monetary convergence, which means European Central Bank (ECB) interest rates are now more appropriate to domestic growth, inflation and the fiscal stance. Steadier growth of domestic consumption and exports, both supported by lower and more stable inflation, will promote industrial output growth around 1.5% 1.8%. A slowdown in private consumption after 2015 will largely offset the gradual recovery of public consumption. Despite a slowly declining fiscal deficit, the continued current account surplus indicates an excess of domestic saving over investment and should reduce vulnerability to volatile capital flows. But it also highlights the difficulty of keeping resources reinvested in the local economy. The aging population makes an outflow of investment funds unavoidable, and will be a factor keeping medium-term growth below 2%, despite high savings levels and improving company profitability. 2015 2014 Unemployment 6. 1% Consumer prices 2014 1. 2% EY Eurozone Forecast June 2014 Malta 1
Growth of 1.8% in 2014, as EU presses for deficit cut Public spending cuts weigh on growth Malta s GDP growth is forecast at 1.8% this year and is expected to settle in the medium term at about the same pace, driven mainly by investment and exports. Expansion will be sufficient to bring the fiscal deficit back within the limits approved by the EU, but continued fiscal tightening needed to reduce public debt remains a constraint on growth, despite improving labor market flexibility. The pickup in growth to 2.4% in 2013, which was better than initially expected, mainly reflected a rebound in private consumption and the consequent move by consumer goods producers to rebuild stocks. Consumer spending was lifted by recovery in real wages, as inflation slowed while the relatively tight labor market continued to drive pay rises. The slowdown in inflation was helped by a reduction in residential energy charges. Higher disposable income and household spending offset the effects of a continued decline in fixed investment in 2013, a sharp drop in public consumption under pressure from the EU, and a dampening of the previous year s trade boost as exports fell faster than imports. The growth rate is forecast to stay close to 1.8% a year in 2015 18. This is no longer ahead of the Eurozone average, but is much steadier than in the 2009 13 period. Although slower than in 2013, growth is becoming increasingly balanced and more sustainable. A sharp recovery of net exports in 2014 15 will encourage a pickup in fixed investment, gaining pace next year. This will be the strongest component of domestic demand throughout the forecast period, assisted by the long interval before ECB monetary policy starts to tighten. Fiscal deficit no longer excessive but must fall further Last year s faster growth enabled the Government to make rapid initial progress on reducing the fiscal deficit. This is officially estimated at 2.8% of GDP in 2013, lower than the target set by the European Commission (EC) when it launched an excessive deficit procedure (EDP) last June. Deficits are forecast to stay below 3% of GDP from 2015, and to be predominantly financed by domestic bond issuance with little addition to external debt. The EC s projections of 2.3% growth in 2014 and 2015 have encouraged policy-makers to believe that the EDP will be formally ended this year. Table 1 Malta (annual percentage changes unless specified) 2013 2014 2015 2016 2017 2018 GDP 2.4 1.8 1.7 1.7 1.8 1.8 Private consumption 1.8 2.0 2.1 1.8 1.7 1.7 Fixed investment 3.9 1.4 2.2 2.4 2.5 2.3 Stockbuilding (% of GDP) 0.9 0.4 0.1 0.8 1.3 1.5 Government consumption 0.2 0.4 0.8 1.3 1.4 1.5 Exports of goods and services 5.5 4.8 4.6 2.7 2.8 3.0 Imports of goods and services 5.1 4.0 4.6 3.8 3.4 3.1 Consumer prices 1.0 1.2 1.5 1.9 2.3 2.3 Unemployment rate (level) 6.5 6.1 5.9 5.8 5.6 5.6 Current account balance (% of GDP) 1.4 2.4 2.7 3.1 3.3 3.1 Government budget (% of GDP) 3.3 3.1 2.9 2.6 2.3 2.0 Government debt (% of GDP) 71.1 72.9 73.5 73.5 72.8 71.9 ECB main refinancing rate (%) 0.5 0.2 0.1 0.1 0.4 1.4 Euro effective exchange rate (1995 = 100) 120.8 125.3 123.7 122.4 121.7 120.9 Exchange rate ($ per ) 1.33 1.37 1.34 1.32 1.31 1.29 2 EY Eurozone Forecast June 2014 Malta
However, the EU will first check that budget strategy is sufficient to keep the deficit declining in the medium term, so that public debt can fall from its current level (just over 70% of GDP). Our forecast suggests that, with growth slowing, last year s deficit reduction will be hard to repeat, and the EU will keep up external pressure to consolidate the budget even if it does close the EDP. Despite its small size, Malta s public finances attract particular attention from Brussels because of the cross-party commitment to public pensions and health care provision, the costs of which are set to rise as a proportion of GDP as the population ages. With the whole country still qualifying for regional aid under the EU s 2014 20 framework, there will still be scope for intervention aimed at generating new business and jobs, and spreading them to less advantaged areas. But net EU structural funding will fall as Malta is reclassified as a transition region in 2014 20, from less developed in 2007 13, with per capita GDP raised to around 86% of the EU average. And pressure for permanently lower deficits will restrict future governments scope to counter downturns in exports or private sector spending through fiscal relaxation. Sale of a 33% stake in one of the major providers of energy generation and distribution will help to reduce public debt and accelerate the modernization of power generation focused on a shift from oil to gas. The deal signed in March will reduce the company s debt by around 500m (to below 300m) and make at least 70m immediately available to finance the gas conversion. Increasing use of gas and renewably generated power enabled a 6.8% drop in carbon emissions in 2013, above the EU average reduction of 2.5%. New ventures formed under the deal will eventually turn energy into an export sector, as Malta supplies wind and solar facilities to other EU locations. Investment responds to growth in service exports Although fixed investment will begin a steady recovery this year, these capital outlays remain low in relation to domestic saving, enabling a current account surplus (around 1.5% of GDP in 2013, rising to 2.4% this year) despite the slowly narrowing fiscal deficit. The outflow of domestically generated savings is a fairly long-standing structural feature. Households have been using international diversification to raise the return on retirement funds, and an increasing number of small and medium-sized enterprises (which generate two-thirds of the country s value-added) must look abroad for market expansion. Figure 1 GDP Figure 2 Inflation % year 7 Forecast % year 5.0 Forecast 6 4.5 5 4.0 4 3.5 3 3.0 2 2.5 1 2.0 0 1.5 1 1.0 2 0.5 3 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Table 2 Forecast for Malta by sector (annual percentage changes in gross added value) 2013 2014 2015 2016 2017 2018 GDP 2.4 1.8 1.7 1.7 1.8 1.8 Manufacturing 1.6 0.4 0.5 0.7 1.3 1.3 Agriculture 3.4 1.6 1.6 1.5 1.4 1.4 Construction 2.9 1.5 1.8 1.7 1.8 2.0 Utilities 2.7 0.5 0.6 0.3 0.3 0.3 Trade 1.2 1.2 0.7 0.5 0.6 0.5 Financial and business services 5.2 2.6 2.6 2.4 2.4 2.4 Communications 6.5 3.8 3.7 3.5 3.5 3.5 Non-market services 2.1 1.7 1.7 1.8 1.9 1.9 EY Eurozone Forecast June 2014 Malta 3
Growth of 1.8% in 2014, as EU presses for deficit cut While growth of merchandise exports generates additional input and energy imports, which will limit the improvement in the visible trade balance after 2014, stronger service exports (especially financial services) and tourism will ensure continuation of the current account surplus. The resultant ongoing improvement in the country s net external investment position contributes to the steadiness of medium-term growth, by ensuring it does not rely on capital inflows to provide external financing. It also ensures that the forecast growth of private consumption is linked to increased real incomes, and not to a reduction of household saving rates. But the net portfolio outflow may constrain the pace of medium-term growth by channeling a significant proportion of domestic saving away from domestic investment. led by finance and tourism Banking, alternative investment funds and online gaming will continue to be important contributors to service exports, and to the overall external surplus, because of their comparatively low import requirement. The banking sector has been largely unaffected by problems in other countries (including Cyprus) because its domestic role is mainly confined to intermediation (with loans largely financed by deposits). Banks total assets and corresponding liabilities are largely external, representing a fee-based service in which revenue is not viewed as vulnerable to shocks, such as a rise in interest rates. Although take-up of registrations under the alternative investment fund manager (AIFM) directive was initially slow, an increase ahead of the deadline at the end of March suggests that Malta is becoming more attractive to larger funds seeking public distribution, which have to register. A potential constraint on expansion deriving from shortage of custody services is expected to be rolled back by 2017, when the current use of foreign custodians will become more restricted. A 13.7% year-on-year rise in arrivals at Malta International Airport in April underlines the speed with which foreign tourism is expanding and the tourist season lengthening as the Eurozone and UK return to growth. Annual growth rates are likely to slow later in the year, but the early success of efforts to attract tourists outside the traditional summer peak-period reduces the risk of facilities becoming congested, while at the same time boosting the return on investment. In the longer term, complementary investments in cultural and creative industries are expected to feed back into tourism from Europe and the Middle East and North Africa, especially as Valletta will be one of the two European Capitals of Culture in 2018. Labor supply expandable, despite low unemployment In contrast, an ostensibly tight labor market is not expected to constrain growth significantly in the next 4 5 years. The past year s GDP growth has been achieved with a slight rise in unemployment, to 6.8% in March (on the EU-harmonized measure) from 6.4% a year earlier. This mainly reflects increases in labor productivity and in the participation rate as more working-age people actively seek jobs. Employment of women is set for sustained expansion, provided childcare provision is upgraded. Women s participation rates have risen steadily and are now approaching 40% (up from below 30% in 2004). But there is scope to raise them further, especially as (in common with most other Eurozone countries) more women than men over 30 have completed tertiary education, acquiring skills that are suited to expanding service sector activities, which are often currently unused. Figure 3 Fiscal balance vs. Eurozone Figure 4 Contributions to GDP % of GDP 2 Forecast % year 10 Forecast 8 0 2 Eurozone 6 4 Domestic demand 2 4 Malta 0 2 6 4 Net exports 8 6 8 10 2003 2005 2007 2009 2011 2013 2015 2017 10 2003 2005 2007 2009 2011 2013 2015 2017 4 EY Eurozone Forecast June 2014 Malta
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