The EY Eurozone Forecast (EEF) forecast is expecting the local economy to continue to grow by three per cent this year, significantly faster than the eurozone average, driven by robust consumer spending, buoyant tourism, large-scale investment in energy infrastructure and a pickup in goods exports. The risks of our forecast are broadly balanced.
Consumer spending rose by 3.3 per cent on the year in 2014, the fastest pace in more than 10 years. With unemployment low and real wages expected to grow steadily, it is expected that private spending will grow by a solid 2.5 per cent this year, supported additionally by low inflation boosting purchasing power (inflation was just 0.5 per cent in March and it is expected that it will average 0.6 per cent for 2015 as a whole).
However, core inflation at 1.4 per cent in the same month reflects the strong domestic activity story, making sustained deflation less of a risk in Malta than in some other eurozone economies.
Strong tourism will also continue to support the household sector in Malta. Tourist arrivals rose by 7.7 per cent on the year in Q1 2015, up from 6.8 per cent growth in 2014, and it is expected that visitor numbers will continue to grow robustly this year, supporting solid growth in employment, wages and consumer spending. The strong rise in tourism will be supported by faster EU growth and by efforts in recent years to improve the quality of the tourism product and attract tourists all year round and from a wider range of countries.
Online gaming is also growing strongly – according to recent comments from the parliamentary secretary for competitiveness and economic growth, around 10 per cent of Malta’s GDP now comes from gaming. Services exports are forecasted to grow by close to seven per cent a year in dollar terms in 2016-19.
The robust growth of the tourism sector has led an impressive turnaround in the current account balance, from a steady deficit up to 2011 to a surplus of eight per cent of GDP in 2014, up sharply compared with the same period a year earlier.
It is also expected that the goods exports will recover this year, aided by the weaker euro and by successful efforts to diversify the goods export base. Indeed, almost a quarter of Malta’s goods exports went to emerging markets in 2014, up from around 10 per cent 10 years earlier and it is anticipated that this diversification will continue. It is forecasted that both goods and services exports will grow by close to four per cent in 2015, after a 0.2 per cent fall last year. It is expected that the current account surplus will fall to seven per cent of GDP this year and to continue to decline in the coming years.
Healthcare reform is crucial to keep the public finances from deteriorating over the longer term
The government balance is well within the eurozone ceiling of three per cent of GDP and revenues have risen strongly in recent years, reaching 10.5 per cent annual growth last year, and it is forecasted that they will grow by more than eight per cent this year. This facilitated government spending growth of seven per cent last year, bolstered by substantial investment in large-scale energy infrastructure to gradually reduce Malta’s dependence on energy imports. Public spending will be growing more slowly in the coming years. The fiscal deficit will edge down to just over one per cent of GDP in 2019.
The economy is expected to grow by close to two per cent a year in 2017-19, driven by robust domestic activity and exports, but there are some downside risks. Government revenues have risen strongly in recent years but more reform is needed to ensure the sustainability of the public finances over the longer term, particularly as the working age population is already falling. Labour market participation has increased in recent years but the participation rate for females and for older workers is still below the eurozone average. The European Commission is currently preparing new long-term projections of pension and healthcare costs. The statutory pensionable age is due to rise from 62 to 65 by 2027 and this will help reduce the burden on the public finances but more reform is needed.
In July 2014, Malta adopted a National Health Systems Strategy plan which will run to 2020. The aim is to improve the efficiency of public health spending to safeguard the sustainability of the state healthcare system over the longer term. In a recent report, the European Commission highlighted that improvements in procurement and distribution processes have already led to large savings. Healthcare reform is crucial to keep the public finances from deteriorating over the longer term.
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. According to Eurostat, estimated average hourly labour costs of €12.4 in 2014 in Malta are only around 80 per cent of those in Cyprus (€15.8). But real labour productivity per person employed rose by just one per cent between 2010 and Q4 2014, whereas for example in Spain, real productivity rose by almost eight per cent over the same period. In the 2014 budget, wages were increased by €3.49 a week (the cost of living adjustment), but in the 2015 budget 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.
The risks of this forecast may now be shifting to the upside. Together with the impact of strengthening demand in the eurozone, the boost from lower oil prices and lower interest rates, which in turn are raising consumers’ spending power and business confidence, may lead to Maltese growth exceeding these expectations.
However, although Malta has a relatively low debt burden by eurozone standards, it would nevertheless be hurt by financial contagion from a Greek exit and the resulting impact of slower growth elsewhere in the eurozone.
The EEF is a quarterly EY publication compiled in conjunction with Oxford Economics.