Malta’s economic performance
In the same vein, the same economic forecast suggests that the Maltese economy is expected to slow down in the next two years. However, Malta’s economy is healthier than that of most eurozone members. Malta’s deficit is expected to increase to three and a half per cent despite the Maltese government’s attempts to bring it down to below three per cent of GDP by the end of 2011. Debt is also expected to grow from just under 70 per cent of GDP in 2011 to nearly seventy one per cent in 2012.
The GDP is expected to grow modestly by just over two per cent in 2001 and by less than one and a half per cent in 2012, well above the half per cent being forecast for the euro area.
The Commission is also expecting Maltese exports to increase by four and a half per cent in 2011 and just fewer than four per cent in 2012, along with a one per cent increase in employment in 2011 and just less than one per cent in 2012. Unemployment should be stable at just under seven per cent in 2012 against over ten per cent in the euro area.
The forecast suggests that inflation in Malta is expected to slow down to just over two per cent in 2012 from over two and a half per cent in 2011 which would keep it higher than the forecast for the euro area.
The European Commission’s forecast indicates that sovereign-debt crisis in euro-area Member States has spread, debt sustainability in advanced economies outside the EU has also moved into investors' focus, and the global economy has lost steam. Firms are expected to postpone or cancel investment as the growth outlook has darkened amid increased uncertainty.
Fragile public finances
Households are projected to consume prudently, while in some Member States also continuing to work down high levels of debt. Moreover, banks are likely to restrict lending, thereby further curtailing the prospects for investment and consumption. Fiscal consolidation has become more urgent as concerns about sustainability have become more acute and spread to hitherto unaffected countries. The weakening real economy, fragile public finances and the vulnerable financial sector appear to be mutually affecting each other in a vicious circle. Confidence and growth will only return once this negative interaction is interrupted.
In combination, the policy measures decided over the past months are expected to be effective in reducing the uncertainty related to the sovereign-debt and financial-market crisis towards mid-2012 and this will gradually release deferred investment and consumption.
Employment growth is expected to grind to a halt in 2012. The expected pick-up of GDP growth starting in the second half of next year is too moderate to produce any strong labour market performance. Unemployment is not expected to fall over the forecast horizon. The situation of Member States' labour markets continues to differ substantially.
Public finances continue to gradually improve
2011 marks the change form stabilisation to consolidation of public finances. Fiscal deficit outcomes for 2011 are now projected at just under five per cent of GDP in the EU and slightly over one per cent in the euro area. For 2012, deficits are projected at just under four per cent in the EU and nearly three and a half per cent in the euro area.
Energy prices have been the main driver of inflation in 2011. As they are projected to gradually decrease, headline inflation is expected to fall back below two per cent in 2012. Persistent slack in the economy will continue to hold back underlying price pressures, while wages are expected to grow only moderately.
Risks to the outlook strongly tilted to the downside
In view of the frail GDP growth expected under the baseline scenario, the risk of a recession is not negligible. The main downside risks stem from sovereign debt worries, the financial industry and world trade. There is a potential for negative dynamic interactions: Slower growth affects the sovereign debtors, whose weakness weighs on the health of the financial industry.
On the upside, confidence might return faster than currently assumed, releasing the potential for an earlier-than-expected recovery of investment and private consumption. Global growth could prove more resilient than projected in the baseline scenario and provide support to EU net exports. Finally, a larger decline in commodity prices could enhance real incomes and consumption.
The detailed report