Both domestic and external conditions contribute to ensuring ongoing growth in Malta, albeit at slow rates compared with pre-crisis standards.
Business confidence has tended to rise since the end of last year
The main economic challenge is to ensure that growing sectors, such as tourism, financial services and high-tech remain competitive.
This will require further investment, both domestic and foreign, according to the summer Ernst & Young Eurozone Forecast (EEF) on Malta.
The EEF predicts GDP growth at 1.3 per cent in 2013 and 2014, followed by 1.7 per cent a year in 2015-17, little changed from the spring report. Indeed, Malta has proved resilient to volatility in the eurozone.
According to a European Commission survey, business confidence has tended to rise since the end of last year. Investors have also remained confident about the resilience of the economy.
As of mid-May 2013, share prices were still slightly above their levels of the beginning of the year, while 10-year government bond yields were around 20 basis points lower, at only around 3.5 per cent.
Households’ purchasing power and consumption will benefit from a moderation in inflation in 2013.
Consumer price inflation has fallen sharply from more than four per cent in mid-2012 to 0.9 per cent in April 2013. One main factor accounting for this fall has been lower energy price inflation.
The EEF forecasts that oil prices will stay at just above $100 per barrel this year and rise only gradually from 2014.
But downward price pressures have also emerged in other sectors. In particular, holiday accommodation packages and transport services and cars have contributed to lower inflation. Some of this is accounted for by relatively weak demand putting pressure on markups and retail prices.
Looking ahead, inflation is forecast to remain below two per cent over the forecast horizon. Chris Meilak, economist at Ernst & Young Malta, said: “Weak growth in the eurozone will limit increases in import prices and domestic price pressures should also be contained by ongoing uncertainty about the outlook.”
Consumer spending will also be supported by a low unemployment rate, which has hovered around 6.5 per cent since mid-2011. Unemployment is expected to remain broadly stable again this year and next, as companies take advantage of increasing levels of activity to raise productivity levels and profitability.
From 2015, with the recovery more firmly established, job creation should accelerate, enabling the unemployment rate to fall below six per cent. After a 1.1 per cent fall in 2012, consumer spending growth is forecasted at one per cent this year and 1.4 per cent a year in 2014-17.