Country Report Malta March 2009

Outlook for 2009-10

Against the backdrop of a rapidly deteriorating economic outlook and a fragile fiscal position, the governing Nationalist Party (PN) faces a challenging period in office. As economic activity slows sharply in response to falling domestic demand, a reversal of a credit-driven property boom, rising unemployment and a slump in demand from Malta's main trading partners, there is a risk that conflict between the government and social partners could escalate. The PN prime minister, Lawrence Gonzi, could also struggle to maintain parliamentary discipline. Despite many potential sources of friction, the Economist Intelligence Unit expects the PN to remain in office. 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 1.9% in 2009, with a negligible recovery in 2010. Inflation will fall back quickly during 2009.

The political scene

In mid-January Mr Gonzi broke with long-standing tradition and nominated an opposition politician, George Abela, to be Malta's eighth president. There was broad popular support for the move. Most political parties have presented their candidate lists for the forthcoming European Parliament elections in June.

Economic policy

Increasing evidence of the economic downturn has spurred calls for additional stimulus measures. A fragile fiscal position offers little room for manoeuvre, however, with Malta one of six member states to be warned by the European Commission in February over its deteriorating public finances. Last year's wide-ranging reforms to energy tariffs continued to court controversy, with the social partners challenging the plans. In December the government presented a draft bill to parliament outlining its proposed reform of property rental legislation.

The domestic economy

Business and consumer surveys reported weakening sentiment in the closing months of 2008, with industrial order books falling sharply. Inflation remained stubbornly high in the fourth quarter of last year, reflecting high energy costs. Solid job gains were reported in the third quarter, but unemployment edged up in late 2008. Tourist numbers declined rapidly in the fourth quarter.

Foreign trade and payments

Export demand fell sharply in the fourth quarter, but with imports also sliding, the trade deficit narrowed slightly on a year-on-year basis. The deficit grew in 2008 as a whole. There was a small current-account surplus in the third quarter.

This report covers the following industry codes:
SIC Code: 60;53;70
NAICS Code: 52;44;72