The Spring EY Eurozone Forecast (EEF) is expecting the Maltese economy to grow by 2.7 per cent in 2015 and 2.3 per cent in 2016, remaining ahead of the eurozone average.

Based on publicly available data as at the end of February 2015, EEF highlights the strong GDP growth registered by the Maltese economy during 2014, as underpinned by improved domestic activity.

The EEF is a quarterly EY publication compiled in conjunction with and based on Oxford Economics (OE) forecasts.

It found that 2014 performance was strong on various counts. Investment grew by around five per cent year-on-year, supported by the low interest rate environment and boosted by the construction of a cable connecting Malta to the mainland Europe energy network. Private spending also registered solid momentum, growing by some 2.5-3 per cent on the year in 2014, helped by lower electricity costs (reduced in April 2014). Lower unemployment also supported 2014 growth, with the jobless rate dropping to 5.8 per cent from 6.45 per cent in 2013. This supported steady (if fairly modest) growth in wages and salaries.

After the stronger-than-expected outturn in 2014, the forecast estimates growth to slow in 2015 (2.7 per cent) and 2016 (2.3 per cent). Domestic activity is expected to remain solid, supported by expansionary fiscal policy, the firm labour market and lower fuel costs, while exports of services should remain strong.

The forecasts expect investment to continue to grow strongly in 2015-16 as a large LNG plant is to be constructed and the existing power plant is to be converted to LNG. Lower fuel costs will also help. Oil prices are now expected to average just $55 a barrel in 2015, benefiting both households and businesses. Indeed, energy carries a weight of nearly a third in the Producer Price Index, which has fallen by 2.5 per cent in 2014 and may drop even more in 2015.

Consumer price inflation slowed to 0.4 per cent in December 2014 and is expected to average just 0.6 per cent this year. Robust services activity and the expansionary fiscal stance should however keep non-energy prices growing at a reasonable pace. Indeed, core prices, excluding food and energy, were still 1.4 per cent up on the year in December, compared with 0.8 per cent in the eurozone. The firm labour market, with services employment rising strongly, should support steady growth in real wages, supporting consumer spending of at least two per cent in 2015 and 2016.

Almost 40 per cent of Malta’s goods imports in 2013 were mineral fuels, lubricants and related materials, and as a result the lower oil price will substantially reduce the import bill.

The current account surplus is expected to remain above two per cent of GDP in 2015. Goods exports fell last year but firmer activity in the rest of the eurozone and the weaker euro should boost exports this year, in turn encouraging stronger manufacturing output. Around 24 per cent of Malta’s exports went to the rest of the eurozone in 2013 and, prompted by stronger external demand, industrial output is expected to grow by 0.9 per cent in 2015 after declines in 2013 and 2014.

The eurozone forecast found that 2014 performance was strong on various counts

Strong services exports should also support the current account surplus. Employment in the service sector has grown very robustly in recent years and now accounts for almost 80 per cent of the workforce.

Tourist arrivals rose by 6.8 per cent in 2014 and should continue to grow robustly in 2015-19, helped by stronger growth across the EU. The strength also reflects efforts in recent years to improve the quality of the tourism product and attract tourists outside the traditional summer peak season and from a wider range of countries.

Online gaming remains a key contributor to growth, with more than 10 per cent of Malta’s GDP now comes from this sector. The number of licences issued to gaming firms rose by 25 per cent last year. The forecast expects the fiscal deficit to narrow to two per cent of GDP in 2015, as revenues (which rose by almost 13 per cent in January-November 2014) continue to grow strongly. Government debt has been rising in recent years, but this inevitably linked to the funding in capital spending. Indeed, debt interest payments accounted for almost 10 per cent of total government spending in 2013 and this burden reduces flexibility over policy slightly, limiting the scope to increase spending in other areas. However, the debt burden is expected to ease gradually in the coming years, from 69 per cent of GDP now to below 64 per cent by 2019.

Malta’s expertise in tourism and financial services is well-established and will underpin steady longer-term growth. As a small and very open economy, however, it is crucial that Malta maintains competitiveness in these sectors and continues to address structural, including healthcare.

According to Eurostat, average hourly labour costs of €12.8 in 2013 in Malta are only around 60 per cent of those in Spain (€21.1). But real labour productivity per person employed rose by just 1.2 per cent between 2005 and Q2 2014, whereas real productivity in Spain rose by almost 14 per cent over the same period. In the 2014 Budget, wages were increased by €3.49 a week, but in 2015 they will be increased by just €0.58 a week. However, an increasing number of employers believe wages rises should be linked to productivity rather than inflation as this would encourage productivity gains.

Malta’s GDP is expected to grow by an average of about 1.9 per cent a year in 2017-19, underpinned by solid domestic activity, expansionary fiscal and monetary policy and strong services exports. The strength of the services sector and the healthy public finances should mean that Malta is less at risk of deflation than other eurozone members, although it would quickly suffer if the rest of the eurozone were to experience a prolonged spell of deflation.

With the size of ECB’s quantitative easing program surprising on the upside, the boost to growth in Malta may be larger than expected, at the same time as lower oil prices and lower interest rates are boosting consumers’ spending power and business confidence.

As part of the EEF initiative, EY Malta, supported by the Ministry for Finance and the University of Malta, is holding an event on Thursday March 26 at the Portomaso Business Suite, Hilton Hotel, St Julian’s, from 8.30am to noon.

The event will include a roundup of the latest EY Eurozone and Malta forecasts presented by key guest speaker Tom Rogers, senior economist at Oxford Economics, followed by presentations on topics related to the local economic context by Philip von Brockdorff, head of Economics Department at the University of Malta, and Chris Meilak, senior manager and economist at EY Malta.

For registration, send an e-mail to Jennifer.Tonna@mt.ey.com.

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