Economy heads for a slowdown

The Maltese economy is headed for a slowdown in the next two years, according to a forecast by the European Commission, which warned of a looming European recession.

Though predictions put the island in a better position than most of the eurozone members, its economy is expected to suffer as Europe heads into another recession.

The deficit is expected to grow, right when the government is forecasting to bring it down to below three per cent of GDP by the end of this year. Debt will inevitably follow suit.

The forecasts were released yesterday during a press conference in Brussels in which European Economic and Monetary Affairs Commissioner Olli Rehn gave a gloomy picture of what is expected for Europe.

He warned that the “economic growth in the EU has stalled” and that a recession was “looming”.

There is, however, good news for Malta.

The GDP is expected to keep growing modestly by 2.1 per cent this year and 1.3 per cent in 2012, well above the 0.5 per cent being forecast for the euro area.

The Commission is also expecting more exports, growing by 4.5 per cent this year and 3.9 in 2012, along with a one per cent increase in employment this year and0.8 per cent in 2012. Unemployment should be stable at about 6.8 per cent in 2012 against 10.1 per cent in the euro area.

The report, which is always based on conservative estimates, says that, while inflation is expected to slow down to 2.2 per cent in 2012 from 2.6 per cent this year, it is still expected to be higher than the 1.7 per cent forecast for the euro area.

Malta’s deficit, which this year is ­estimated at three per cent of the GDP, is expected to rise next year to 3.5 per cent.

The same forecast is being made for the island’s debt, which from 69.6 per cent of GDP this year is expected to rise to 70.8 per cent in 2012.

The biggest risk to the country’s financial stability comes from Air Malta and the recent disbursements to help Greece, according to the European Commission.

General government gross debt increased by 6.8 per cent between 2008 and 2010 to 69 per cent of GDP and is forecast to rise marginally to 69.6 per cent of GDP this year.

Based on the no-policy change assumption, the debt ratio is expected to rise further over the forecast horizon, reaching 71.5 per cent of GDP in 2013, mainly reflecting the deterioration in the primary balance.

According to Brussels, the negative assessments of Malta’s debt and deficit scenarios are the result of two main actions.

Debt projections, it says, also include the impact of guarantees to the European Financial Stability Fund, bilateral loans to Greece and the participation in the capital of the European Stability Mechanism as planned at the cut-off date of this forecast.

The upcoming restructuring of Air Malta could give rise to additional government expenditure, thereby entailing upward risks for both the deficit and debt projections, the report notes.