Economy 'on the rebound'

Malta's economy is expected to continue to show signs of recovery in the next two years, according to the European Commission, which described last year as a "rebound" year.

In its detailed report issued twice annually analysing the performance of the Maltese economy, the Commission said there are mixed signs of a recovery and it expects growth to continue in the forecast period up to 2007.

The Commission noted that following a contraction of 1.5 per cent in 2004, real GDP growth turned positive to 2.5 per cent last year. This "rebound of economic activity" was driven by domestic demand, especially inventories.

A Commission spokesman yesterday told The Times that "when taking into account the tough measures being implemented in order to get the country's structural deficit into line, the Maltese economy is still producing very encouraging results".

The Commission is now forecasting a slower growth rate of 1.7 per cent this year and 1.9 per cent in 2007. This rate would also be lower than the EU25 average which is forecast to grow by 2.3 per cent and 2.2 per cent in 2006 and 2007.

"Real GDP growth is expected to slow down somewhat to 1.7 per cent this year and accelerate to around two per cent in 2007.

Economic activity is projected to be almost exclusively domestically driven in both years, while the negative contribution of the external sector should narrow significantly.

"Private consumption is forecast to grow by around 1.25 per cent in 2006 and accelerate to 1.5 per cent in 2007, on account of higher wage growth, while, following the substantial fiscal consolidation in recent years, public consumption is projected to increase by around 1 per cent in 2006 and 1.5 per cent in 2007," the report says. Employment is expected to keep following the current constant trend with no big positive or negative changes.

According to the Commission, although employment growth is expected to decelerate this year as works on the Mater Dei Hospital approach their completion, job creation in other activities is expected to pick up owing to improved prospects mainly in the private sector.

"With the restructuring of the manufacturing industry almost complete, job losses in traditional sectors should bottom out, while employment will be created by nascent sectors such as pharmaceuticals."

The Commission's report gives full marks to the government's efforts to consolidate its public finances and highlights the fact that 2006 is expected to be the year when Malta's deficit will fall in line, for the first time, with the EU benchmark of three per cent of GDP.

"Fiscal consolidation proceeded during 2005 as the deficit declined to 3.3 per cent of GDP. In 2006, the general government deficit is expected to decline further to below three per cent as a result of tax buoyancy mirroring the domestically led composition of growth and capital transfers."

On the other hand the Commission foresees a growth in inflation, which is not good news for Malta's aspirations to adopt the euro in 2008.

According to the Commission, "the outlook for inflation shows a rise to almost three per cent in 2006, both as the impact of the recently introduced market-based utility rates are fully captured by the index and as a result of expected further increases in energy prices".

Inflation is, however, expected to start declining next year, when the final decision by the EU on Malta's euro application is taken.

The next economic forecast for Malta will be published by the Commission in autumn.