A European Economic Forecast issued today praises Malta for a stronger than expected rebound in the first half of 2010, although it is expected to soften in the latter part of the year.
The recession in Malta started at the end of 2008 and lasted three quarters. Its total impact in terms of real GDP contraction over 2009 was one of the mildest in the euro area, at 2.1% compared to 4.1% for the euro-area average.
The decline in exports, together with the sharp retrenchment of investment, mainly machinery and housing construction, and the depletion of inventories were the key drivers of the decline in real GDP in 2009.
The report says that the slower growth of real GDP in the second quarter this year – 0.1% compared to 1.4% in the first quarter – may be indicative of a slowdown in the momentum of economic recovery.
Real GDP growth in 2010 as a whole is forecast to expand by 3.1%, as the positive contribution of net trade is expected to moderate in the second half of the year.
The report says that domestic demand is expected to pick up strongly during the course of the year due to a sharp increase expected for public investment, partly financed from EU grants.
"Notwithstanding a moderate increase in real disposable income as a result of weak wage growth and higher energy prices, private consumption is forecast to start growing again, mainly due to the more favourable labour market conditions already seen in the second quarter this year."
Government consumption is expected to rebound, also due to the temporary recovery measures adopted with the 2010 Budget.
In 2011-12, domestic demand is expected to continue to be the main contributor to real GDP growth.
Increases in machinery and non-residential construction will underpin private investment, while residential construction is set to pick up in 2012.
As households' disposable income and consumer confidence are expected to improve further due to the anticipated better labour market conditions, private consumption growth is set to accelerate.
As a result of the pick up in both consumption and investment, imports are expected to grow faster than exports, with the contribution of net trade expected to turn slightly negative.
The report says that labour market conditions improved significantly in the first half of this year. Employment was seen to grow faster than labour supply, which led to a decline in the unemployment rate from its peak of 7.2% at the end of 2009 down to 6.2% in September this year.
Employment is expected to expand by 1.1% this year, and to rise at a slightly higher rate in 2011-12.
For 2010, wage growth is expected to remain relatively subdued, picking up towards the end of the year and becoming more dynamic in 2011 in line with employment developments.
A further acceleration is anticipated for 2012, also explained by the anticipated higher pressure from the cost-of-living adjustment mechanism (COLA).
Unit labour costs are expected to fall in 2010, after the steep rise recorded in 2009, and to increase again by an
average of 2% over 2011-2012. HICP inflation is expected to average 1.9% in 2010, remain broadly stable in 2011 and increase to 2.3% in 2012, as private consumption accelerates.
After decelerating in 2010, food inflation is again expected to become an important contributor to HICP inflation, given the assumed increase in global food commodity prices over the forecast horizon.