Economic rebound was stronger than expected

Brussels expects deficit to increase again by 2012

The European Commission has described Malta’s emergence from the global recession as “stronger than expected”, saying the island had managed to be among the eurozone countries that suffered the least harm to their economies.

Giving details of the progress made this year and forecasting the scenario until the end of 2012, the Commission’s Autumn Economic Forecast gives an upbeat picture albeit with some exceptions, particularly in the way of inflation.

It says the strong pick-up in exports this year has been the main contributor to the island’s economic performance in 2010, leading to employment growth that was “faster than the labour supply”. GDP growth rate was one of the strongest in the eurozone.

The first half of 2010 witnessed a stronger than expected rebound in economic activity. Year-on-year real GDP growth until the second quarter is estimated to reach four per cent, mainly resulting from a strong rebound in external demand.

“The steep increase in exports, primarily of machinery, was only partly offset by the increase in imports, of mainly industrial supplies. Domestic demand, however, remained more subdued,” the report says.

At the same time, while the economy is expected to keep performing above the EU average over the next two years, Brussels is forecasting a slower pace of growth. This, it says, is due to a less buoyant outlook for the external environment, also related to the phasing out of the recovery measures in a number of EU member states as well as a stronger euro.

With one of the lowest unemployment rates in the EU, Brussels expects no real change over the next two years, with the rate expected to hover around 6.6 per cent.

On the negative side, inflation is expected to remain higher than the EU average, mainly driven by the price of energy and food. The Commission’s analysis notes that: “Food inflation is again expected to become an important contributor to inflation, given the assumed increase in global food commodity prices over the forecast horizon.”

The increase in excise duties on alcohol and tobacco announced in the last Budget is also expected to have a relatively strong impact on processed food inflation, according to the Commission.

With regard to utility tariffs, the Commission says these have highly characterised inflation in Malta in recent years since the subsidies on electricity and gas were eliminated.

“The recent commitment by the government to keep electricity tariffs in 2011 fixed at the 2010 rate will help to partly compensate for the expected pick-up in fuel prices, which are affected by the announced increase in excise duty. In 2012, energy inflation is expected to be driven again by electricity given the expected reversal of the measure implemented in 2011.”

The government is seen to be in line to achieve a deficit of under three per cent of GDP by the end of next year, although the debt ratio is expected to remain high and possibly increase.

The Commission is however sceptical about the government’s projection of an even lower deficit in 2012: “Based on a no-policy change assumption, the deficit is anticipated to widen again to 3.3 per cent of GDP (in 2012) mainly due to the projected lower impact of one-off measures and still-substantial increases expected in capital spending, although partly financed with EU funds.”


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