Country Report Malta December 2008

Outlook for 2009-10

Against a backdrop of a rapidly deteriorating economic outlook and a fragile fiscal position, the governing Nationalist Party (PN) faces a challenging period in office over the next few years. As economic activity slows in response to falling domestic demand, a weakening housing market, rising unemployment and deteriorating prospects among Malta's main trading partners, there is a risk of conflict between the government and social partners. Despite many potential sources of friction, however, the Economist Intelligence Unit expects the PN to remain in office over the outlook period. The recent sharp deterioration in the public finances is projected to continue in 2009, as the economic downturn depresses revenue growth and boosts welfare payments. Painful consolidation measures are likely to be needed to return the public finances to a sustainable path. We expect real GDP to contract by 0.9% in 2009, with only a sluggish pick up in activity in 2010. Inflation (EU harmonised) is projected to fall back quickly during 2009 as domestic and external price pressures ease.

The political scene

Facing growing pressure to deal with the sharp rise in illegal immigration, the government welcomed the signing in October of a new immigration accord by EU member states, although it applies only on a voluntary basis. Government plans to raise energy tariffs provoked widespread protests.

Economic policy

The government strengthened the state deposit guarantee scheme, as risks facing the banking sector increased. The central government finances deteriorated on a year-on-year basis over the first ten months of 2008. Government projections for the public finances in the 2009 budget presented an optimistic picture given the deteriorating economic outlook. In November the government announced the privatisation of the gas division of the state-owned energy group, Enemalta.

The domestic economy

GDP growth slowed to 2.2% year on year in the third quarter of 2008. Activity was driven entirely by private and government consumption, while investment and export demand weakened sharply. Inflation (EU harmonised) rose to an average of 5.3% in the third quarter and 5.8% in October, reflecting temporary energy price movements. Job growth slowed in the third quarter, while the rate of unemployment picked up in October. Tourist numbers weakened sharply.

Foreign trade and payments

The trade deficit widened sharply on a year-on-year basis over the first nine months of 2008, as export demand fell. This contributed to a rapid widening of the current-account deficit in the second quarter.

This report covers the following industry codes:
SIC Code: 49;70
NAICS Code: 22;72