The latest spring economic forecasts published by the European Commission on Monday are projecting a bleaker scenario for the Maltese economy, which is set to contract by 0.9 per cent in 2009.
At the same time, public deficit, after reaching a high of 4.7 per cent in 2008, is still being projected to stay above the 3 per cent Maastricht reference level at 3.6 per cent of GDP in 2009 and 3.2 per cent in 2010, leading the Commission to issue excessive deficit procedures against Malta (see page 3 story).
This contrasts sharply with the forecast given by the Central Bank of Malta in its annual report for 2008, a few weeks ago, which forecast a slight growth for 2009 (0.5-1.1 per cent) and a budget deficit of 2.4 to 2.6 of GDP, therefore below the Maastricht criteria.
In the 2009 Budget speech last November, Finance Minister Tonio Fenech projected a budget deficit of 2.4 per cent growth rate.
But the Commission said that real GDP is expected to contract by 0.9 per cent in 2009 and to return to positive territory in 2010 at 0.2 per cent.
“Further income tax cuts and receding inflation should provide some support to disposable income in 2009,” the Commission said in its report.
“However, softer labour market conditions, slower wage growth and weakening consumer confidence are likely to dampen private consumption over the forecast horizon,” the EC warned.
The Commission said that investment was forecast to pick up in 2009 “mainly due to public capital spending in the context of the Recovery Plan.
The Commission was still banking on the construction of Smartcity to support private investment for 2009, “but other capital outlays will be adversely affected bythe deterioration in the global economic environment and falling profitability”.
For 2010, investment growth was anticipated to remain “relatively strong as the ICT project gathers pace and in anticipation of a moderate global economic upturn.
“Following a year-on-year deceleration in the first three quarters, economic activity contracted in the last three months of 2008 leading to an annual real GDP growth of 1.6 per cent, down from 3.6 per cent in 2007,” the Commission explained in its report.
The Commission said private consumption grew by “a solid 4.1 per cent as income tax cuts, higher transfer payments and a relatively strong labour market more than offset the impact of increases in food and utility prices”.
However, Government consumption expenditure expanded by more than double at 8.3 per cent.
Gross fixed capital formation shrank significantly last year.
“Investment in construction contracted on the back of both lower housing starts and a decline in public investment, mostly equipment, following the completion of the Mater Dei hospital,” the Commission said in its spring forecast.
Exports continued to shrink throughout last year, “mainly reflecting lower foreign sales of goods. To a lesser extent, exports of services also fell as tourist arrivals dropped sharply, especially in the final quarter of 2008”.
In response to lower exports and investment, imports during last year also contracted significantly.
The Commission confirmed that general government deficit, which declined progressively in the period 2005-2007, increased to 4.7 per cent of GDP in 2008.
The Commission said the deterioration primarily reflected “higher expenditure related to a one-off deficit-increasing transaction of 0.8 per cent of GDP in respect of early retirement schemes for Malta shipyards’ employees as well as the reclassification of the yards into the general government sector.
“Lower tax receipts also contributed to the higher deficit ratio, reflecting
weak economic activity,” the Commission explained in its report.
“The general government deficit was projected to decline to around 3.5 per cent of GDP in 2009 “as a result of the disappearance of the one-off operation mentioned above and the liquidation of the Shipyards, the sizeable reduction in energy subsidies and the revenue-increasing measures announced in the 2009 budget.”
This is the first time that the liquidation of the Shipyards is being mentioned by the Commission.
However, the economic downturn would adversely impact on direct taxes including tax receipts on property transactions.
“Under the customary no-policy-change assumption, the deficit ratio in 2010 is projected to decline marginally to 3.25 per cent of GDP,” the Commission explained in its report.
Following a rise to slightly above 64 per cent of GDP in 2008, from 62 per cent in 2007, “general government debt is projected to follow an upward trend increasing to almost 69 per cent in 2010.”
After reaching 4.7 per cent in 2008, inflation was forecast to ease to 1 per cent in 2009 “reflecting subdued domestic demand as well as the unwinding of previous year’s higher food prices.
Tourist accommodation prices, representing around 20 per cent of the index, “were also expected to recede in the wake of weak prospects for tourism”.
For 2010, inflation was expected to average 1.8 per cent, “on the back
of the assumed price pressures from unprocessed food and energy prices”.
Labour market conditions were expected to weaken during the forecast period. “As an initial response to sagging external demand, affected companies are expected to reduce the number of hours worked rather than resort to layoffs,” the Commission said in its forecasts.
Employment was foreseen to contract by 0.5 per cent in 2009 and to grow in 2010, “albeit at rate below the historical average. As a result, unemployment is expected to increase over the forecast horizon, reaching 7.6 per cent by 2010”.
The Commission explained that “the worsening economic activity in Malta’s main trading partners is expected to depress exports over the forecast horizon.
“Declining industrial order books in the first few months of 2009 suggest that foreign sales of goods, dominated by semiconductors, will continue to shrink,” the EC warned.
For tourism, “a reversal of the gains recorded in the past years on the back of sluggish demand, in particular from the UK and Germany, Malta’s leading tourist markets, is anticipated”.
“This will be only partly offset by other services, specifically remote gaming, which is expected to show some resilience to the global slowdown,” the Commission said.
The contraction in exports was projected to decline in 2010 in line with the assumed gradual international economic turnaround.
Consistent with the slowdown in both private consumption and import-intensive exports, imports were forecast to contract in 2009, before recovering in 2010.