Economic activity expected to recover

Economic activity in Malta is expected to progressively recover from the downturn experienced last year, according to the autumn forecast report published by the EU Commission on candidate countries yesterday.

The report says domestic demand is expected to be a driving factor for growth over the forecast period, further enhanced by a positive contribution of net exports to growth in 2004.

According to the report, unemployment is expected to reach a peak this year "affected by enterprise restructuring and a weak performance of the tourism sector". However, it is estimated to decrease in 2003 and 2004, following an expected recovery in external demand.

The report says the government deficit is also expected to improve over the forecast period, although it is still expected to remain relatively high.

After a marked economic slowdown in 2001, the outlook for real GDP growth is expected to improve over the forecast period.

"Output growth is nevertheless estimated to remain below the average of the period 1997-2000. A recovery of domestic demand, together with a slight recovery of the external sector, are becoming visible in 2002. In 2003 and 2004, increasing external demand is expected to engender an improvement of the Maltese external sector, although domestic demand is expected to continue as a leading factor for growth over the forecast."

It says domestic demand is expected to be enhanced by private consumption growth, as economic uncertainty is dissipating and wage increases related to productivity increases are expected.

In addition, higher external demand and employment growth are likely to increase prospects of higher income. Public consumption growth is estimated to be significant in 2002, although it is estimated to decelerate over the forecast. Investment growth is estimated to remain low this year, the report says, as lower investment within the manufacturing sector is not being outpaced by relatively strong public investment and construction activity.

However, investment is expected to increase visibly in 2003 and 2004, primarily led by the private sector, given the need to cope with higher competition and increasing external demand.

The external sector is expected to recover progressively after a marked negative performance in 2001. A sharp fall in exports was clearly outpaced by falling imports leading to a reduction of the current account deficit to 5 per cent of GDP.

The report says Malta's export performance is expected to remain weak this year, as external demand remains low and the electronics and tourism sectors' performance continues to be below expectation.

"The expected recovery in external demand in 2003 and 2004 is foreseen to lead a recovery of export growth, although it is anticipated to be outpaced by import growth in 2003.

"The positive effects of higher external demand are expected to be most felt in 2004, when they are likely to couple with higher export capacity stemming from the effects of several ongoing structural reforms."

As a result, the report says, the current account deficit is expected to deteriorate to about six per cent of GDP this year and remain stable in 2003, largely led by a deterioration of the services account.

However, it is expected to improve in 2004, when manufacturing exports, in particular electronics, and tourism activity are expected to pick up notably, driving the deficit down to around five per cent of GDP.

The report says the current account deficit is expected to be broadly financed by foreign direct investment over the forecast period, largely due to several planned privatisation deals.

On unemployment, the report says a gradual recovery in external demand next year is expected to be a major factor for a decrease in unemployment until 2004, when it is anticipated to reach its lowest level over the period at close to six per cent.

"By 2004, industrial liberalisation and ongoing structural reforms are expected to have increased competition and efficiencies and therefore the potential for growth and for job creation in several sectors. This is expected to largely compensate for job losses due to enterprise restructuring in other sectors, while a recovery of the tourism sector is expected to contribute visibly to higher employment."

Annual average inflation during the outlook period is expected to remain below that of 2001.

"Year-on-year, inflation increased in 2001 to 2.9 per cent, largely led by increases in food prices. In the absence of such increases, inflation is expected to decrease this year and stand at around 2.5 per cent in the remaining forecast period.

"Wage moderation is expected to be maintained over the forecast period, as wages are expected to rise in line with productivity increases, while higher competition due to industrial liberalisation and enterprise restructuring should also help to keep inflation relatively low, compensating to a large extent for potential price increases due to price liberalisation effects.

Turning to the deficit, the report says that it remained unchanged at seven per cent of GDP in 2001, as low growth undermined tax revenues and several categories of expenditure, such as health and education, increased significantly.

"Interest payments on government debt also increased markedly as some expected privatisation transactions did not take place, impeding the debt to decrease to previously anticipated levels. The deficit is expected to decrease to slightly above four per cent of GDP in 2004, as output growth is estimated to accelerate and tax collection and controls over expenditure will continue to be enhanced."

The report says privatisation is expected to limit debt and interest payments growth during the forecast period.

"However, pressures over expenditure are expected to remain, keeping the deficit relatively high. Such pressures mainly concern health and education outlays, the compensation scheme for the removal of agricultural import levies, the restructuring programme for the shipyards and costs related to the implementation of the EU acquis," the report says.

In its overview, the report said candidate countries had, on average, sustained solid growth despite the worsened international economic climate.

"Economic growth has only slightly slowed down during 2002. Due to strong domestic demand, most candidate countries showed resilience and the extent of the slowdown remained limited," the report says.

Labour Party spokesman Leo Brincat said in a statement that the report showed that contrary to what the finance minister had recently claimed, the local economy had fared badly this year.

Natalino Fenech adds from Brussels: Asked whether the Commission was satisfied with the ecomomic situation in Malta and whether there were any factors which were preocupying the commission, economic and monetary affairs commissioner Pedro Solbes said the main preoccupation was that the government deficit was higher than forecast because of lower economic growth and the payment of interests on the debt.

"However, there is evidence of growth and this is expected to continue this year and in forthcoming years and this will facilitate Malta's accession process," Mr Solbes said.