03 November 2004

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Slow economic recovery forecast

By Karl Schembri

The European Commission has forecast a slow and gradual economic recovery for Malta over the next two years.
The Autumn 2004 Economic Forecasts report issued last week says private consumption is expected to gain momentum in the next two years, to the point of becoming the main growth driving force, while public consumption is projected to keep decelerating “and stay rather flat”.
Also, the gradual completion of public investment projects will moderate investment.
GDP growth in 2003 was limited to 0.2 per cent, mostly stemming from private and public consumption and gross fixed capital formation. It was also artificially inflated thanks to the effect of a one-off operation – the disposal of Air Malta aircraft while the change in stocks added notably to the GDP growth as well, whereas external sector contribution was negative.
After reaching 2.3 per cent in the first quarter of this year, GDP growth could not maintain momentum and fell by 1.5 per cent in the second quarter.
“In the first half of 2004, private consumption remained sluggish, partly because of high household spending in the last quarter of 2003 in anticipation to the rise in the VAT standard rate as from 2004,” the report notes. “For the year as a whole, private consumption is expected to fall slightly due to the uncertain economic environment, whereas public consumption is set to decelerate significantly.”
Imports are projected to slowdown substantially, the report adds but conversely, exports are likely to pick up sharply due to more dynamic world demand.
The sharp increase in oil prices has not yet fully impacted on costs and prices due to the time lag between price rises in the international market and the moment they are reflected to the internal energy prices, the report says.
Job creation will remain modest – a reflection of the sluggish economic activity – the report states, while slow growth and ongoing restructuring in the manufacturing sector are likely to increase the unemployment rate to 8.4 per cent by the end of this year.
“As economic recovery gains momentum and the real unit labour costs increases remain modest, the unemployment rate should gradually improve in the subsequent years.”
As a result of stronger exports, the current account deficit is set to narrow to four per cent of GDP this year from 5.3 per cent last year.
“The predicted economic recovery, partly sustained by external demand, should entail a declining current account deficit throughout the forecast period to 2.8 per cent of GDP in 2006,” the report states.
The general government deficit is also foreseen to fall from 9.6 per cent of GDP last year to 5.1 per cent this year.
“It will follow a downward path and reach 4 per cent of GDP in 2005 and 3.3 per cent of GDP in 2006,” the report predicts. At the same time, gross public debt is expected to increase from 70.3 per cent of GDP in 2003 to 74.2 per cent in 2006.
Overall, growth in the dozen member states sharing the Euro will reach 2.1 per cent in 2005 – less than the 2.3 per cent predicted in April.
“The slowdown in world growth will result in a moderate deceleration in export growth,” the commission, the European Union's Brussels-based executive agency, said in the draft. “Higher and volatile oil prices and other commodity prices might put a damper on global growth.”
Europe will trail behind the US through 2006, completing a 14-year stretch in which European growth lags the US pace 13 times, the forecasts show. US growth of 4.2 percent in 2004 will decelerate to 3.1 percent in 2005 and 3 percent in 2006, the document shows. Japan will also outdistance Europe, growing 4.2 percent in 2004, 2.3 percent in 2005 and 2.4 percent in 2006.
“A renewed sharp appreciation in the euro exchange rate could undermine activity mainly in the euro-area manufacturing sector,'' the report says. “Consumers are still wary about committing themselves to purchases of larger consumer durable goods. Recurrent geopolitical tensions continue to weigh on consumer confidence.”

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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