Malta's economy is set to recover over the coming two years, although at a slower pace than the rest of the EU member states, according to the Autumn Economic Forecasts published yesterday by the EU.

The island's important economic indicators including GDP growth, exports and imports, tourism, employment and public finances are all set to improve next year and in 2007 although a drop in exports and imports is being noted for the current year.

According to the twice-yearly study compiled by the economic and monetary directorate of the European Commission, Malta's GDP is expected to grow modestly by 0.7 and 1.1 per cent in 2006 and 2007 as against an expected growth of 0.8 per cent this year.

Some of the characteristics attributed to this growth, according to the report, are a recovery in both private and public consumption and an increase in exports.

"Private consumption is expected to gain momentum and increase by 0.6 per cent in 2006 and 0.9 per cent in 2007. This small recovery of private consumption can be explained by a slight rise in disposable income, in turn supported by a still-high-job-content of growth over the forecast horizon.

"After a period of strong fiscal consolidation, public consumption growth is projected to increase by 1.1 per cent in 2006 and by 1.3 per cent in 2007. While growing at lower rates than in 2005, investment growth should remain strong," the report said.

With regard to exports, the EU report states that these are expected to rebound moderately in 2006 and accelerate in 2007.

"This rebound should largely be supported by better prospects for the semiconductor and tourism sectors. Imports are expected to be slightly more dynamic than exports, due to the recovery of consumption."

The turnaround in the economy, although modest, should keep steady employment levels and contribute to a further decline in unemployment levels, the report says.

"Despite slow GDP growth, employment is projected to keep rising, largely owing to the ongoing labour-intensive infrastructure projects. In parallel, the unemployment rate should marginally fall to 6.8 per cent in 2007."

Inflation, which this year will reach 3.1 per cent due to the increase in oil prices, is also forecast to drop slightly to 2.6 per cent next year, decreasing further to 2.2 per cent in 2007. With regard to public finances, the EU recognises the leaps forward registered in past years however warns that slow economic growth can take its toll on the government's targets.

"After declining to 5.1 per cent of GDP in 2004, the 2005 deficit is expected to fall to 4.2 per cent of GDP. Although Malta is implementing the measures planned in the 2005 budget, including expenditure cuts and revenue enhancing measures, lower-than-expected GDP growth is an obstacle to the achievement of the deficit target set up in the Convergence Programme for 2005. Under a no-policy change scenario, the general government deficit is set to decrease to three per cent of GDP."

In its breakdown, the EU also comments on this year's economic activity, describing it as sluggish during the first three months of the year and improving during the following months. The EU said that GDP growth should be slightly lower than one per cent of GDP, however public and private consumption remained negative.