EU forecast points to strengthening economic recovery, warns about competitiveness

A Spring Economic Forecast Report prepared by the EU's Directorate-General for Economic and Financial Affairs says that Malta is continuing to outperform the euro area as a whole, albeit less markedly than in recent years.

The report says that the recovery underway since the second half of 2009 is expected to gradually gain strength. Real GDP is expected to expand by just above 1% in 2010 and to accelerate in 2011 to 1.7%, well below the average over the last decade.

"Still, Malta continues to outperform the euro area as a whole, albeit less markedly than in recent years."

The report says domestic demand is projected to recover gradually, mainly driven by a marked pick-up in investment already in 2010. "This owes to a significant increase in public capital spending in environment and construction."

In 2011, a stronger and more broad-based recovery in private investment is projected as capacity utilisation returns to its historical average and the profitability of foreign-owned companies improves due to the assumed global economic turnaround. Private consumption is expected to weaken slightly in 2010 given subdued consumer confidence from still weak labour market conditions but the improved economic outlook more generally, together with continued real wage growth, should boost it in 2011.

Benefiting from the assumed expansion of world trade, specifically in non-EU markets, exports growth is anticipated to gradually gain strength in 2010 and to stabilise in 2011. Imports are set to outperform exports, supported by the pick-up in investment, thus leading to a negative contribution of net exports to output growth.

The report warns, however, that the private sector will need to respond flexibly to counteract the erosion in competitiveness witnessed in recent years in the composition of external demand for goods and services produced in Malta.

It notes that per capita wage growth moderated markedly in 2009.

"From 2010, wage growth per capita is projected to pick up again, to a level above the euro-area average, reflecting inflation trends rather than productivity gains, thus putting some pressure on Malta's competitiveness," the report says, a comment whih mirrors warnings made by the Governor of the Central Bank of Malta last month.