Further deterioration in the circumstances facing Malta’s major trading partners has led Ernst and Young to lower the island’s 2012 growth projections to 0.7 per cent in its Eurozone Forecast for autumn.
Further Budget cuts may still be needed to attain this year’s deficit target
Its summer forecast had been upbeat on the slight improvement in the island’s economic outlook and had projected GDP growth would reach around one per cent. However the global firm now believes that given the external environment, any expansion after slipping – and emerging – from a technical recession earlier this year would be considered an achievement.
The Central Bank’s forecast of 2.2 per cent growth next year was a demonstration of the optimistic view on investment and trade recovery. But the weak external outlook has prompted Ernst and Young to “remain more cautious”, and its expectations are that Malta’s economy will expand by 1.3 per cent in 2013 and to just over two per cent the following year.
After contracting for four successive years, Ernst and Young expects investment to return to an upward trend this year. It rose 5.1 per cent on the year in the first quarter but, overall, investment growth is expected to be close to zero for the year. It is forecast to grow gradually to around four per cent by 2014 and 2015.
Although the “unusually” large banking and financial sector could be a potential risk to growth, recent data has suggested that this industry is shielded from systemic risk – particularly with capitalisation sitting above international minimum ratios and with only modest exposure to peripheral eurozone sovereign debt.
Despite the slow growth, the fiscal deficit is now set to stay below three per cent, especially as the government is making progress in keeping debt risk at bay. Ernst and Young underlines how these developments will benefit investment.
“Keeping within agreed eurozone deficit limits ensures continuation of the current tax regime that attracts inward investment, especially to the financial sector,” the forecast said, but it warned: “Further Budget cuts may still be needed to attain this year’s deficit target and the approach of the general election by March 2013 will raise more obstacles to their implementation from Q4.”
Ernst and Young is anticipating a “sharp reduction” in public spending growth over the next few quarters. Falling unemployment is helping to keep the cyclical rise in social spending in check.
Ernst and Young’s current projections see public debt remaining above 70 per cent of GDP until 2014, followed by a gradual decline.
It predicts that net exports will continue to improve as inward investment helps to deliver products that compete well in the EU despite high transport costs. This, it says, will lead the current account deficit to narrow at the appropriate pace to keep external financing risks down.
The firm’s study anticipates the current account deficit will fall below three per cent of GDP this year from 2011’s 3.2 per cent. However, the slowdown among trading partners in the eurozone could impact export growth, it adds.
The forecast notes how Malta’s attractiveness as a production location is undermined by inflation remaining at above-regional rates, even though relatively low borrowing costs are buoying investment.
The momentum in the trade balance turnaround is also being affected by rising relative costs, and tourism growth could also be impacted in the longer term. Positive numbers in tourist arrivals in June and July signal a recovery despite the weak external outlook.
Ernst and Young says policy uncertainty in the eurozone is still clouding the economic view. The threat of renewed market volatility will linger until leaders agree on a plan for deeper integration. It assumes that the eurozone will “muddle through” in its current guise and its crisis resolution will make gradual progress.
After eurozone GDP fell 0.2 per cent in the second quarter of the year, Ernst and Young forecasts a contraction of about 0.5 per cent in 2012 as a whole. The forecast has revised its eurozone GDP growth projections, saying it will remain below 1.5 per cent during 2015-16 after it previously expected it to rise to around two per cent.