Outlook for the Maltese economy 2021-2024

The Central Bank of Malta expects Malta’s gross domestic product (GDP) to grow by 5.4% in 2022, 4.9% in 2023 and 3.8% in 2024. Compared to the Bank’s previous projections, this represents a downward revision of 0.6 percentage point in 2022 and 0.4 percentage point in 2023.

The downward revision reflects the deterioration in the international economic environment due to the Russian invasion of Ukraine and the lockdown measures in Asia.

These headwinds have weakened global trade and have exacerbated supply chain disruptions and shortages of key vital inputs. Such disruptions have also increased imported price pressures.

Net exports are expected to be the main driver of growth in 2022, reflecting the correction in import-intensive investment outlays from the exceptional levels reached in 2021.

The contribution of domestic demand is expected to be positive but significantly lower compared to that of the previous year. In the following years, domestic demand is expected to lead the expansion in economic activity, reflecting especially a foreseen strong contribution from private consumption.

At the same time, the contribution of net exports is projected to remain positive, reflecting the gradual normalisation of tourism exports and growth in foreign demand more generally.

Employment growth in 2022 is expected to reach 2.9% from 1.6% in 2021. It is set to moderate to just below 2% by 2024. The unemployment rate is projected to decline to 3.3% this year, from 3.5% last year and it is expected to hover within this range over the outlook period.

In view of the expected increase in inflation this year, wage growth is projected to be relatively strong as employees might demand some partial compensation for the increase in prices.

Nevertheless, nominal wage growth is projected to remain below that of inflation due to some lag in the transmission from prices to wages. In the following years, wage pressures are expected to moderate as the labour market becomes less tight.

Annual inflation based on the Harmonised Index of Consumer Prices is projected to accelerate to 5.0% in 2022, from 0.7% in 2021. The sharp pick-up in inflation reflects a broad-based increase across all sub-components of HICP except for energy inflation.

Import price pressures are expected to moderate somewhat by the beginning of next year, although these are envisaged to remain high by historical standards. HICP inflation is expected to moderate to 2.9% by 2023, driven by lower contributions from all subcomponents except for energy inflation. Inflation is set to ease further in 2024, to 1.8%.

The general government deficit-to-GDP ratio is projected to recede to 5.6% of GDP in 2022, from 8.0% in 2021. It is expected to narrow further to 4.0% of GDP in 2023, and to 3.2% of GDP in 2024.

This profile is driven by the unwinding of COVID-19 support measures in 2022, which should offset outlays on price mitigation measures. The general government debt-to-GDP ratio is projected to stand at 58.7% of GDP in 2024.

On balance, risks to economic activity are to the downside for 2022 and 2023, and on the upside for 2024. These risks stem from a possible prolongation of the Russia-Ukraine war.

More persistent supply bottlenecks as well as higher input and transport costs, could adversely affect manufacturing output, private consumption, and investment.

Foreign demand could also be weaker than expected if monetary policy in advanced economies responds more forcibly to inflation than assumed in this baseline.

These downside risks could be mitigated somewhat by possibly more expansionary domestic fiscal policy, an earlier resolution of the war, as well as the possibility of a faster drawdown of domestic private savings.

Risks to inflation are on the upside during the entire projection horizon. Indeed, the prolongation of the war, as well as China’s zero-COVID policy, could increase commodity prices further and exacerbate imported price pressures and costs. Finally, wage pressures could be stronger than expected if high inflation persists for a longer period.

On the fiscal side, risks mainly relate to a larger deficit in 2022 and 2023. These mostly reflect the likelihood of additional Government support to mitigate rising commodity prices and State aid to Air Malta.