Strong consumption fuelling Malta’s robust economic growth – Central Bank of Malta

Malta’s GDP is set to grow by 4.4 per cent this year, according to the Central Bank of Malta’s (CBM) latest forecast – a significant upward revision over the previous estimate of 3.8 per cent made late last year.

The upward revision is mainly on account of positive revisions in private consumption and net exports in the latest national accounts data release.

While in 2023, growth is expected to have been primarily driven by net exports, domestic demand is envisaged to be the main driver of growth in 2024.

Private consumption growth continues at a brisk pace and private investment, is expected to recover slowly. Net exports are also projected to contribute positively, driven mainly by services exports. Growth in 2025 (3.6 per cent) and 2026 (3.3 per cent) is also expected to be led by domestic demand.

The CBM noted that employment growth is set to moderate in the projection horizon, while wages are expected to pick-up in 2024, in view of the high inflation in the recent past, and a tight labour market.

Annual inflation based on the Harmonised Index of Consumer Prices is projected to ease from 5.6 per cent in 2023, to 2.9 per cent in 2024, before reaching 1.9 per cent by 2026.

“It is thus foreseen to remain above the Eurosystem price stability objective this year due to lingering indirect effects through the response of wages to recent increases in input costs and profit margins,” it said.

“However, compared to previous projections, inflation has been revised down by 0.1 percentage point throughout the forecast period, in line with recent data outturns.”

The general government deficit-to-GDP ratio is set to decline throughout the projection horizon, while the general government debt-to-GDP ratio is set to increase, to reach 54.3 per cent by 2026.

When compared with the previous projection round, the projected deficit and debt ratios were both revised downwards.

On balance, according to the CBM, risks to economic activity are tilted to the downside in 2024, as the ongoing geopolitical tensions could weigh on trade.

“In particular, disruptions to shipping around the Suez Canal could give rise to some supply bottlenecks or longer waiting times, apart from possible higher costs. Risks are more balanced in the following years.”

Risks to inflation are also balanced.

Meanwhile, upside risks relate mainly to ongoing geopolitical tensions especially disruptions to trade in the Red Sea, as well as the potential impact of Fit-for-55 measures and extreme weather events. On the other hand, downside risks relate to a stronger pass-through from monetary tightening to domestic financial and real economic conditions, as well as the impact from the Government’s measure to curb prices of selected food products in the short term.

On the fiscal side, risks are tilted to the downside from 2024 (deficit-increasing). These mainly reflect the possibility of higher-than-expected outlays on energy support measures, in the event that commodity prices are higher than envisaged.

They also reflect the likelihood of additional expenditure on pensions and public sector wages.

These risks are partly offset by the likelihood of a pick-up in the pace of fiscal consolidation in the outer years of the forecast horizon.