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The economy is expected to stabilise over the three years to 2025 as inflation and Government spending moderate over the period, with the biggest driver of growth being consumer spending fuelled by wage growth.

The projections emerge from the Central Bank of Malta’s economic forecast for the period between 2023 and 2025.

Malta’s gross domestic product (GDP) growth is projected to moderate significantly from 6.8 per cent in 2022 to 3.7 per cent in 2023, and to ease slightly further to 3.6 per cent and 3.5 per cent in 2024 and 2025, respectively.

When compared to the previous projections, the CBM’s latest forecast for headline GDP is broadly unchanged, as upward revisions in private investment and exports were offset by an upward revision in imports.

In 2023, domestic demand is expected to be the main driver of growth as investment begins to recover after last year’s contraction, while consumption is expected to remain relatively robust.

The net export contribution is expected to be marginal in 2023, as exports should grow at a significantly slower rate following the strong rebound seen in 2022.

Although the contribution of net exports is set to edge up slightly in 2024 and 2025, domestic demand is then expected to remain the main driver of growth in those years.

Employment growth is set to moderate too, from 5.4 per cent in 2022 to 3.3 per cent in 2023, which partly reflects the envisaged slowdown in economic activity towards its potential. Over the rest of the projection horizon, employment growth is set to stand at two per cent. The unemployment rate is expected to stand at three per cent in 2023, and to remain at a relatively low level of 3.2 per cent in 2024 and 2025.

In view of the increase in inflation in 2023, together with tight labour market conditions, wage growth is projected to be relatively strong. Nevertheless, nominal wage growth is forecast to remain below consumer price inflation in 2023 due to lags in the transmission from prices to wages.

In later years, the CBM expects wage growth to remain robust and outpace consumer price inflation.

Annual inflation based on the Harmonised Index of Consumer Prices (HICP) is projected to remain high in 2023, but significantly lower than in 2022.

It is envisaged to stand at 4.5 per cent in 2023, down from 6.1 per cent in 2022.

The fall in inflation reflects a broad-based decrease across all sub-components of HICP, except for energy inflation. Services is envisaged to be the main contributor to HICP inflation, but non-energy industrial goods (NEIG) and processed food are also projected to contribute strongly to annual HICP inflation in 2023. Inflation is set to ease further in 2024 and 2025 to 2.3 per cent and 2.1 per cent, respectively.

The general government deficit-to-GDP ratio is estimated to have declined to 5.2 per cent of GDP in 2022, from 7.5 per cent in 2021. It is then projected to narrow further to 4.9 per cent of GDP in 2023, and to continue declining over the rest of the forecast horizon, reaching 2.9 per cent of GDP by 2025.

This improvement is driven by a declining share of expenditure in GDP, especially following the unwinding of COVID-19 support measures in 2022 and the declining profile of inflation-mitigation measures.

The general government debt ratio is estimated to have decreased in 2022 and then increase progressively over the rest of the forecast horizon, stabilising at around 58 per cent by 2025.

On balance, risks to economic activity are slightly tilted to the downside in 2023 and more balanced thereafter. The main downside risks relate to the possibility of stronger than envisaged weakness in the international economic environment, which could lead to lower exports.

Foreign demand may also be weaker than expected, especially if monetary policy in advanced economies tightens more forcibly than assumed in this projection round. Some of these risks could be mitigated by stronger than expected wage growth, which could offer additional support to household consumption.

Risks to inflation are considered as balanced for the entire projection horizon.

“Indeed,” the CBM notes, “while the effect of upward price pressures to salaries in Malta and an incomplete lagged pass-through of past increases in energy costs in the euro area could increase commodity prices further, the re-opening of China could be seen as a partial reversal of the previous supply shocks.

“Also, a stronger pass-through of the recent appreciation of the euro, monetary tightening as well as lower international energy and transport costs should result in downward pressures on inflation.”

On the fiscal side, risks are on the downside (deficit-increasing) from 2023 onwards.

These mainly reflect the likelihood of state aid to the national airline, though possible weaker economic growth would also have an impact. These risks may be partly offset by the profile of outlays on price mitigation measures, which could be less than projected if oil and gas prices stabilise at lower levels.

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