There will be a slowing in economic growth in the early part of 2011 as the boost from public spending and net exports fades, according to the latest Ernst & Young Eurozone Forecast for Malta.
“Despite the Budget’s emphasis on investment, GDP growth will slow in 2011 due to weaker net export growth and the delay before rising private investment brings new capacity on stream. Stronger investment-led growth will resume in 2012,” according to the December 2010 winter edition of the Ernst & Young forecast.
Ernst & Young says it expects growth to average 2.1 per cent in 2011, in contrast to the Maltese government’s forecast of three per cent, before accelerating towards three per cent from 2012.
The forecast says the economic upturn in Malta in 2010 has been heavily dependent on external trade, and received a boost from strong eurozone demand in Q2 and Q3, “the continuation of which is uncertain”.
“Year-on-year growth of industrial exports continued in Q3, leaving the visible trade deficit 13 per cent lower than a year ago (at €965 million) between January and September. But slack domestic demand dropped the year-on-year growth of industrial output to 3.6 per cent in August and just 0.3 per cent in September, from a peak of 9.6 per cent in May.
“Industry has shown monthly output declines since May, with only one brief upturn in July. September’s 5.6 per cent monthly decline was the steepest in the EU. This confirms our forecast that a weaker Q4 will drop full-year GDP growth back toward two per cent,” it says.
The report said that consumer demand in Malta remains weak, despite an apparently tight labour market, with unemployment still the eurozone’s fourth lowest, at a seasonally adjusted 6.2 per cent in September.
“Retail sales volume rose in July but then fell for the rest of Q3, with a record year-on-year decline of 1.3 per cent in September. Despite employment growth in high-tech manufacturing and services, supported by education and training investment, recent job creation has been at the lower end of the pay scale, doing little to raise discretionary spending,” the forecast says.
It says that with neither exports nor private expenditure currently strong enough for sustained production growth, the Maltese government is sticking with Budget plans that are initially looser than demanded by the EU.
“Having judged the fiscal deficit to be excessive, the European Commission wants it brought down to 3.9 per cent of GDP in 2010 and three per cent in 2011. While present official projections show the 2010 target of 3.9 per cent being met, we consider that the 2011 target (of 2.8 per cent) is unlikely to be achieved, as the Budget assumed 8.5 per cent revenue growth that will be hard to achieve as the pace of recovery slows,” Ernst & Young says.
The forecast says that with expenditure and revenue measures broadly offsetting each other, the deficit reduction expected by the government for 2011 is mainly dependent on a cyclical pick-up in government revenues.
“Given that growth is likely to be weaker than the government projects, we expect the deficit to still be 3.8 per cent of GDP in 2011. The government is expected to persist with its present strategy which, on present forecasts, will bring the deficit below three per cent of GDP by 2013, as the GDP growth rate returns to a trend of around three per cent.”
The forecast says that with public debt officially estimated at 69 per cent of GDP in 2010, any overshoot on the deficit will incur renewed EU calls for tougher action to curb public spending. “But as there is little systemic risk to the eurozone from a Maltese overshoot, punitive action is unlikely.”
The report says Malta’s fiscal position appears sustainable and it has so far avoided becoming embroiled in the eurozone’s sovereign debt crisis.
Ernst & Young eurozone report on Malta
The credit rating agencies have maintained a stable outlook for sovereign debt on the basis of the early return to growth (from mid-2009), it says. Moreover, the financial system has remained stable through the global crisis and public budgeting is now much more disciplined than before Eurozone entry.
Ernst & Young says September’s consumer price inflation rate of 2.4 per cent (on the EU comparable index) remained well above the 1.8 per cent eurozone average and a sharp rise in that month’s annual producer price inflation (to four per cent on the Statistical Office measure) underlines the continued pipeline inflationary pressure.
“Producer prices are being pushed up mainly by energy costs, up 22 per cent year on year in September, whose impact on the consumer index will last into early 2011,” the report stresses.
The inflation differential over eurozone partners remains an obstacle to narrowing the current account deficit, according to the report, which is set to rise in 2011 to around six per cent of GDP.
“Despite a move into higher-value manufacturing, visible exports remain price sensitive, with rising transport costs a particular impediment to deeper integration into EU industrial supply chains. Rising prices are also a risk to continued growth of tourist arrivals, at a time when EU households are under tightening budget constraints.”
The forecast says the tourism sector will be under pressure to absorb cost rises, including the 2011 Budget’s hotel VAT increase.
“In the short term, tourism continues to benefit from the Q2 and Q3 recovery in eurozone income and expenditure, with arrivals in August 16.9 per cent higher than a year ago, and overnight stays up almost 11 per cent. Hotels’ occupancy rate reached 82 per cent, almost eight points higher than in August 2009.”
It says the outlook for tourism in 2011 is more subdued, with UK income and expenditure growth slowing and eurozone travellers also set to become more budget conscious; arrivals from Germany have already dropped below the trend.
“In the longer term, the sector’s physical and human resources continue to improve, helped by public-private partnerships for which provision is maintained in the 2011 Budget; consequent capacity improvement, especially for higher-spending tourism, will help to underpin the acceleration of GDP growth from 2012.
“Despite inflation, Malta will remain a low-cost destination in the quality bracket it has now entered and marina projects now under way in Valletta and elsewhere will create extra capacity for cruise and yacht arrivals, to complement the sustained rise in scheduled and charter air traffic. Air travel from the UK (still the source of more than 30 per cent of air arrivals) may be boosted by that country’s rise in air passenger duties from November; a greater impact on long-haul flights could divert some travellers into European destinations,” the forecast concludes.