Wage growth in Malta is the slowest in the EU

Wages in Malta are growing at the slowest rate among all EU member states, the European Economic Forecast, published on Wednesday, has revealed.

The European Commission’s Autumn forecast for 2023 puts wage growth in Malta at 1.5%, making it the lowest rate in the European Union. Meanwhile, wage growth was fastest in some Eastern countries, reaching 20.2% in Romania.

Malta also ranks lowest in the EU in terms of real compensation per employee. Indeed, the year-on-year change in real compensation per employee stood in the negative at -4%.

Despite this, Malta tops the ranking in employment growth, with 3.7% growth. This increase in employment is being fuelled by strong labour demand, especially in tourism and administrative services.

According to the forecast, energy prices and supply bottlenecks were at the root of the recent inflation surge. But in Malta, non-energy imports were an important factor driving price increases.

A breakdown of Malta’s prices shows inflation between 2019 and 2022 was driven by non-energy imports and domestic unit profits and taxes.

Higher inflation in Malta led to decelerated private consumption and decreased investment, although the forecast notes a surge in aviation sector investment in 2022.

Despite government measures to cap consumer energy prices, the European Commission is still projecting inflation for 2023 to reach 5.7%, moderating to 3.3% in 2024 and 3.1% in 2025.

Economic growth

Malta’s economic growth is expected to moderate from 6.9% in 2022 to 4.0% in 2023 as the effects of the post-pandemic consumption and investment rebound expire.

Despite higher inflation, private consumption already achieved 5.2% growth in the first half of 2023 and no further slowdown is expected as retail sales growth remain positive.

The tourism sector continues to rebound strongly, already exceeding the pre-pandemic levels, with further growth prospects in 2024 and 2025. Investment in 2023 is expected to decline by more than 20% due to the exceptional growth of 2022 related to the acquisition of aircraft.

This also drives the corresponding fall of imports. Information from the main industries suggest further rebound in exports. Net exports are set to be the main contributor to GDP growth in 2023, with consumption being the main driver in 2024 and 2025. Real GDP is forecast to continue to grow at 4.0% in 2024, accelerating slightly to 4.2% in 2025.

Employment

Malta is expected to maintain a high pace of employment and population growth, a key factor driving the outlook for consumption despite the expected weak recovery in real wages.

Employment increased by an impressive 6.2% in 2022 and continued to grow very strongly in the first half of 2023, fuelled by strong labour demand which increased across all sectors of the economy, both public and private, and was especially strong in tourism and administrative services.

The labour force is set to continue growing at a robust pace in 2024 and 2025 in line with population growth as the country continues to attract foreign workers. Malta’s unemployment rate fell to 2.9% in 2022 and is expected to fall further to 2.7% in 2023, 2024 and 2025.

Deficit

Meanwhile, the government deficit will decrease over the coming years, but still remain above the 3% target from the Stability and Growth Pact.

In 2023, the budget deficit decline is primarily driven by the reduction of the net budgetary cost of measures to mitigate the impact of high energy prices, accounting for 1.6% of GDP and down from 2.3% in 2022.

Growth in compensation of employees and social benefits slower than nominal GDP growth is also expected to contribute to the deficit reduction.

In 2024, the expected phasing out of the costs related to the national airline is the main factor determining the reduction of the deficit.

Social benefits and intermediate consumption expenditures are expected to grow slower than nominal GDP growth, thereby contributing to the reduction of the deficit.

Conversely, the net budgetary cost of energy-related measures is projected to increase again, to 2.0% of GDP in 2024. Interest expenditures are also expected to increase.

In 2025, the reduction of the deficit to 4.1 % of GDP is set to be driven by the decline of the net budgetary costs of energy related measures (forecast at 1.0% of GDP in 2025) and intermediate consumption expenditures, but partially offset by an increase in gross fixed capital formation and interest expenditure. The contained growth of social benefits is also expected to contribute to lowering the deficit ratio.

The government debt-to-GDP ratio is set to increase to 53.3% in 2023, to 55.8% in 2024 and to reach 57.2% in 2025 as the primary balance, i.e. the budget balance net of interest expenditure, is set to remain negative despite the high GDP growth rates.