Malta’s growth fluctuates around EU average – KPMG

An analysis of real GDP growth rates from data until 2006 shows that Malta exhibited fluctuations around the EU growth averages, KPMG has concluded.

Government Guaranteed Debt stood at just under €1 billion at the end of 2010

Economic growth and the issue of cohesion to the European Union is one of the key themes addressed in the first edition of Insight, a publication launched by KPMG yesterday.

This publication is intended to be a periodic one, providing KPMG’s insight and analysis on current issues regarding the Maltese economy. The timing of the launch, a few days before Budget day on Monday, is intended to give an insight into some of the important issues in Malta’s current scenario to set the scene for individuals to assess the Budget policy drive.

The upward path in growth rates coincides with Malta’s signing of the EU Accession Treaty in April 2003. Although not the exclusive factor in better economic growth rates, it would seem that entry in the EU and the eurozone has brought greater stability and credibility, in that the Maltese economy grew at a slightly faster pace than EU countries from 2007 onwards, albeit marginally. KPMG notes that Malta is converging towards the EU27 average GDP per capita, although the speed of such convergence is modest.

KPMG argues that competitiveness, as a measure depending on productivity and labour costs, must be given its due importance, particularly because Malta is losing ground with respect to the EU27. In terms of cross-country labour productivity, Malta is lagging behind the EU27 average and, even more so, the euro area.

Malta still has the edge from the cost side, despite slightly lower productivity levels, but this competitive edge can be lost if compensation per employee continues to rise faster than labour productivity. When pitted against a comparative background, the rate of increase in nominal unit labour costs for Malta remains lower than that for the euro area. However, due to the ‘averaging out’ effect of new EU entrants, increases in nominal unit labour costs for the EU27 have been marginally less than Malta’s.

In the labour market context, Malta is characterised by a fairly stable level of employment having a total activity rate of 61.4 per cent, slightly lower than EU27 and EA16 averages. As the process of globalisation continues, employability within the services sector is becoming increasingly important sustaining the need to lower the number of early school leavers for the enhancement of Malta’s human capital resource capacity. On the other hand, ageing population issues are becoming more pronounced as female participation rates remain among the lowest in the EU.

It is also increasingly topical to focus on the state of public finances. Without undermining the importance of involving private sector input, a core level of government intervention is essential to provide society with the necessary public and merit goods, and correct any market failure. Public investment is therefore critical for competitiveness providing the enabling framework to boost economic growth in the medium to long run. Furthermore, stable government finances are key to long-term growth sustainability.

The international crisis has doubtlessly affected the quality of public finances across the EU. Malta was no exception. Having a public deficit higher than EU averages until 2008, an excessive deficit procedure was triggered after which successful fiscal consolidation efforts improved Malta’s position. As debt levels remain high despite being lower than EU averages in later years, the government’s strategy (reflected by the European Commission which is exerting pressure) focuses on the reduction of the Maltese debt ratio by 2014.

Malta’s debt-to-GDP ratio worsened during 2009 and 2010, also due to the negative economic growth in 2009, driven mainly by the slowdown in the manufacturing sector. On the other hand, the increase in GDP growth and inflationary pressures in 2010 exerted a positive effect on the debt ratio, with indications that public finances are becoming more sustainable. KPMG also notes that Government Guaranteed Debt stood at just under €1 billion at the end of 2010.

“In this continually changing economic landscape, there is a deep-felt need to understand the tapestry of modern day economics and international events which shape our lives almost with immediate effect,” KPMG advisory services partner Mark Bamber said. “Malta is not an insulated country, sheltered from global happenings. It is part of a bigger picture in which it must adapt and actively contribute.”

Insight is available for download from www.kpmg.com.mt.