Advisers Ernst and Young said today they expect 2.0% growth for Malta this year as Eurozone export markets slow and budget cuts restrain demand. Growth reached 3.6% last year.
From 2012, stronger growth should resume, in line with Malta's above average trend, at around 3 per cent per year.
They argued in a report on Malta that the island will achieve its objective of a lower deficit while preserving competitive taxation.
"Progress is being made in lowering public sector costs. But capital and current spending will be difficult to disentangle. Overall, we think that Malta will achieve its objective of a lower deficit while preserving competitive taxation," the company said.
It said it expects the budget deficit to shrink gradually toward 2.5% of GDP in 2015.
"One downside risk to our growth outlook is related to possibly larger cuts in public spending needed to achieve fiscal consolidation. Energy price rises will revive inflation and dent consumer spending," E&Y warned. The Consumer Prices Index (CPI) fell 1.3% in January, slowing annual inflation to 3.3% (from 4% in December). Although January’s annual rate remained above the Eurozone average (2.3%), successful containment of last year’s fuel price increases has avoided a larger gap.
"The absence of a wage-price spiral is an encouraging sign of improving supply and labor market flexibility, especially given comparatively low unemployment (6.1% in January) and pressure on resources from refugee influx in Q1.
"However, inflation is likely to rise this year, to average 3.8% in 2011. Another sharp rise in road fuel prices announced by Enemalta in February is expected to be followed by comparable increases in the price of electricity from its oil-fired generators, as the company continues its move toward unsubsidized operation against a backdrop of rising world oil prices."
The company said it expects trong growth will help bring unemployment down from 6.1% in January to below 5% by 2014. This will benefit household incomes, although it risks raising pressure on wages and maintaining inflation above the Eurozone average. It expects inflation at 2.3% in 2012-15.