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The Central Bank of Malta (CBM) has released its latest projections for the Maltese economy, revising its growth projections for the three years to 2024 downwards as international factors like inflation and persistent supply chain issues continue to have an impact.

Malta’s GDP is now forecast to grow by 5.2 per cent in 2022, 4.5 per cent in 2023 and 3.7 per cent in 2024, which represent downward revisions of 0.2 per cent, 0.4 per cent and 0.1 per cent respectively.

The CBM stated that the downward revisions reflect the strong pick-up in inflationary pressures as well as a further deterioration in the international economic environment due to the recent cuts in gas supplies to European countries.

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

The contribution of domestic demand is expected to be positive but significantly lower compared to that of 2021, as growth in activity normalises following the strong rebound last year. In the following years, domestic demand is expected to lead the expansion in economic activity, especially from private consumption.

The contribution of net exports is projected to ease over the projection horizon, reflecting the gradual normalisation of tourism exports and decelerating growth in foreign demand more generally.

Employment growth in 2022 is expected to reach 3.5 per cent from 2.8 per cent in 2021. It is set to moderate to just above 2 per cent by 2024. The unemployment rate is projected to decline to 3.1 per cent this year, from 3.5 per cent 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. 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 pick-up sharply in 2022 and remain high also in 2023. Indeed, it is envisaged to accelerate to 5.9 per cent in 2022, from 0.7 per cent 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.

Hence, HICP inflation is expected to moderate to 3.8 per cent by 2023, driven by lower contributions from all subcomponents except for energy inflation. Inflation is set to ease further in 2024 to 2.1 per cent.

The general government deficit is projected to recede to 5.6 per cent of GDP in 2022, from 7.9 per cent in 2021. It is expected to narrow further to four per cent in 2023, and to 3.2 per cent in 2024.

This profile is driven by the unwinding of COVID-19 support measures in 2022, which offset outlays on price mitigation measures. The latter are set to remain in place but assumed to diminish over the projection horizon. The general government debt-to-GDP ratio is projected to stand at 58.8 per cent of GDP in 2024.

On balance, risks to economic activity are tilted to the downside, especially for 2023, though uncertainty even during 2022 remains high.

The main downside risks relate to the evolution of energy supply from Russia to Europe. This could lead to severe shortages of energy supplies going into the winter, which could in turn adversely affect production abroad and amplify supply bottlenecks.

Foreign demand could also be weaker than expected if monetary policy in advanced economies continues to tighten more forcibly than assumed in this projection round.

These downside risks are mitigated somewhat by domestic fiscal policy which is cushioning partly the impact of imported inflation. In addition, the savings ratio could fall faster than is being assumed in this projection, while upward surprises in tourism could further boost net exports and GDP growth.

Risks to inflation are on the upside during the entire projection horizon. Indeed, further escalation in cuts in gas supplies could trigger a stronger than envisaged rise in commodity prices, which would put further upward pressures on the prices of imported goods and freight costs.

In addition, the EU policy to sharply reduce dependence on Russian fossil fuels could also lead to stronger than expected increases in import costs, particularly in the short-run. The risk of second-round effects from wages and mark-ups grows if high inflation persists for longer.

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 the likelihood of state aid to the national airline.

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