Economy recovering fast but deficit likely to rise – Brussels

Malta’s economy should recover faster than the rest of the euro area but the deficit will rise not fall as planned by the government, according to the EU’s latest economic forecasts for 2010 and 2011.

In its half-yearly analysis of the Maltese economy, the European Commission indicated that the island was managing to get out of the effects of the global recession at a rapid pace, particularly when compared to the other member states of the eurozone. It said a boost in exports and in investment this year and in 2011 would manage to turn around the negative effects of the recession experienced over the past two years when the economy contracted.

“The recovery under way since the second half of 2009 is expected to gradually gain strength over the forecast horizon (2010/2011),” the Commission said.

“Real GDP is anticipated to expand by just above one per cent in 2010 and to accelerate in 2011 to 1.7 per cent, well below the average of the past decade (3.7 per cent). Malta continues to outperform the euro area as a whole, albeit less markedly than in recent years.”

According to the Commission, the expected economic expansion should be driven mainly by an increase in exports, a marked pick-up in investment and more public capital spending in the environment and construction, particularly as a result of EU funds trickling in.

However, the Commission also noted uncertainties surrounding Malta’s ability to benefit from the global upturn and said that the private sector would need to respond with flexibility to counteract the erosion of competitiveness seen in recent years and possible changes in the external demand for goods and services produced locally.

Moreover, despite the positive predictions on Malta’s economy, public finances are expected to remain under stress with Brussels forecasting an increase in the general deficit, running at odds with the government’s projections laid out in the Budget for 2010.

“In 2010, the deficit is expected to widen to 4.3 per cent of GDP also because of lower deficit-reducing one–offs,” the Commission said. “Based on a no-policy-change assumption, the deficit is projected to narrow to 3.6 per cent of GDP in 2011, mainly thanks to the expiry of some temporary support measures adopted within the 2010 Budget.”

The Finance Ministry, however, pointed out that the Commission’s deficit forecasts were always based on the “worst-case scenario while the government’s projections are more on the optimistic side”.

On the jobs front, Malta is also expected to perform better than its eurozone colleagues, although improvement is expected to remain moderate.

While unemployment levels in the euro area are likely to reach record levels of 10.3 per cent this year, in Malta the jobless are expected to remain at 7.3 per cent. Employment growth this year is anticipated to be 0.3 per cent, still better than last year’s -0.6 per cent.

With regard to the cost of living, the Commission noted that, although decelerating from the peak reached in 2008, inflation was still projected to stay above the euro area average but close to two per cent. Once again, the EU Executive underlined the unexplained high cost of food prices in Malta. “In line with recent experience demonstrating sticky domestic food prices in spite of increased competition in the distribution trade, food inflation is expected to remain relatively firm over the forecast period.”