Country Report Malta

Outlook for 2008-09

The ruling Nationalist Party (PN) won a narrow victory in the general election on March 8th. The PN's previous five-seat majority in parliament has been reduced to just one, but this is unlikely to lead to political instability, with the new leadership of the opposition Malta Labour Party (MLP) seeking to restore unity within its ranks. The PN government will focus on meeting its campaign pledge to implement generous personal income tax cuts, while at the same time pursuing fiscal consolidation to honour its commitments as a euro area member. This will be challenging in a weaker economic environment. Real GDP growth over the outlook period is expected to be below 3%, reflecting weaker private consumption growth. The current-account deficit will rise slightly this year, before narrowing in 2009. Inflation (EU harmonised) is projected to rise sharply to an average of 4% in 2008, from just 0.7% last year, before easing to 2.8% in 2009.

The political scene

The PN outlined its new legislative programme in May. One of the party's first moves after its election victory was to reactivate Malta's membership of NATO's Partnership for Peace (PfP) programme. In June Joseph Muscat, a member of the European Parliament, was elected as the new MLP leader to succeed Alfred Sant. Mr Muscat received two-thirds of delegates' votes in a second-round run-off against George Abela.

Economic policy

The central government deficit rose by €77m year on year to €209m (US$136m) in the first four months of 2008, underpinned by strong expenditure growth. In May the government announced that prices of traditional Maltese bread would be liberalised from 2009 and that subsidies to bakeries would cease. In the same month Malta's largest private-sector employer and exporter, ST Microelectronics, requested a financial support package from the government.

The domestic economy

GDP growth weakened slightly to 3.7% year on year in the final quarter of 2007, but was boosted by a strong build-up in inventories. Household consumption growth slowed. Inflation (EU harmonised) surged to average 4% in the first quarter of 2008, up from 2.5% in the previous three-month period. Employment rose by 2.2% in the final quarter of 2007 and the jobless rate stabilised at 6.2%.

Foreign trade and payments

The trade deficit widened further in the first quarter of 2008 on the back of lower exports and rising imports. The current-account deficit more than doubled on a year-on-year basis, to €233.8m in the final quarter of 2007.