Malta will face economic downturn in 2009 - Brussels

Malta will be facing an economic downturn next year that will ride on the back of the deterioration in public finances, the European Commission forecast yesterday, describing the growing deficit as a "marked setback".

The announcement came shortly before the Finance Minister Tonio Fenech made his own economic assessment during the budget speech in Parliament last night.

According to the Commission's forecasts, published every semester, Malta will be experiencing an economic slowdown in 2009 along with the rest of the euro area, even though its magnitude should be less than that predicted for the eurozone.

The Commission's biggest concern, however, is with regard to the state of public finances, where, it said, the deficit ratio is estimated to rise to 3.8 per cent of GDP from 1.8 per cent this year.

The widening budget deficit, in fact, has been appearing in official statistics and economist Edward Scicluna has warned that the shortfall on a rolling year basis now stands at 4.3 per cent of GDP, a full four percentage points above the government's projected targets for this year.

In this scenario, the government has very little leeway to cushion the shocks resulting from the global financial crisis. But while the Commission comments critically on the widening budget deficit (while giving a less gloomy forecast) it also says that Malta should be coming out of troubled economic times quicker than the majority of the other EU member states.

The problem, according to the Commission, lies in the wage bill increase, particular in the health sector, higher subsidies, especially on water and electricity prices, the rising price of crude oil and the shipyards' retirement schemes, representing a one-off cost equivalent to one per cent of GDP.

However, despite this deterioration, the situation of public finance can be brought back in line in under a year, the projections say. Nonetheless, Brussels is forecasting that "under the customary no-policy-change assumption, the deficit ratio in 2009 is expected to go down to 2.7 per cent of GDP and to 2.5 by 2010".

The figure would throw back the government's target to post a surplus by this time.

Following a deceleration in economic expansion already seen this year, with GDP growth expected to reach 2.4 per cent by December, the downward trend is likely to persist in 2009.

"Real GDP growth is expected to weaken further in 2009 and remain practically unchanged in 2010. Until now, the financial crisis had a modest effect on Malta but economic activity, especially the external sector, is expected to suffer from the ensuing global slowdown."

The island's economy is expected to suffer particularly from the crisis in areas that contribute strongly to its overall economic performance. Exports will fall because of lower foreign demand and, as a result, there will be an increase in unemployment, from 5.9 per cent in 2008 (a record low) to 6.4 in 2009.

On the other hand, sectors such as ICT and remote gaming are expected to weather well the global slowdown and will continue to be the main contributors to growth in the export of services.

Overall, the Commission says darker clouds are looming over the entire EU. According to its euro area projections, Ireland, Spain and Germany, will be practically in recession next year. Even the UK will see its economy shrink. As a result, the deficit ratio to GDP is expected to grow in the majority of the EU member states as governments will be borrowing to sustain their economies.

Joaquín Almunia, Commissioner for Economic and Monetary Affairs, said after the forecasts were released, that the EU will be facing one of its hardest ever economic downturns and the Commission will be doing all it could to accelerate economic recovery. "The horizon is very dark and recession in the euro area is real," he warned.

"We now need investments and a coordinated EU response to come out of the storm as rapidly as possible".