20/08/2024 09:50:00

Central Bank's Forecast - 2024-2026

Economic growth expected to moderate but remain strong

According to the Bank's latest forecasts, Malta's gross domestic product (GDP) is expected to grow by 4.4% in 2024. Growth is then projected to ease to 3.5% and 3.4% in 2025 and 2026 respectively. This implies a marginally upward revision for 2024 and a marginal downward revision for 2026, when compared to the Bank's previous projection round.

Over this period, growth is expected to be driven by domestic demand, reflecting continued rapid growth in private consumption and a gradual recovery in private investment. The contribution of net exports is also expected to be positive but smaller than that of domestic demand and diminishing over time.

Employment growth is set to moderate, albeit from high rates, with the unemployment rate remaining close to 3%.

The average wage is expected to grow at a significantly faster rate in 2024, partly in response to the pronounced inflation in the recent past and a tight labour market. Thereafter it is expected to moderate somewhat in line with the expected continued moderation in inflation.

Annual inflation based on the Harmonised Index of Consumer Prices is projected to drop significantly, from 5.6% in 2023 to 2.5% in 2024, before reaching 2.0% by 2026. Compared to previous projections, inflation has been revised up by 0.1 percentage point in each year of the projection horizon, reflecting recent outcomes and a re-assessment of services inflation.

The general government deficit-to-GDP ratio is set to narrow to 4.1% in 2024, and to narrow further over the rest of the forecast horizon, to stand at 3.1% by 2026. Nevertheless, the general government debt-to-GDP ratio is set to increase throughout the forecast horizon, reaching 54.1% by 2026. Fiscal projections remain mostly unchanged compared with the previous projection round.

As the upcoming national accounts publication will include a benchmark revision, the above figures may be affected by possible material revisions to past data. Furthermore, such projections could be affected by the publication of updated fiscal plans by Government in fulfilment of the new EU fiscal rules later this year. The Bank's projections could thus be revised somewhat in upcoming rounds of projections once this information becomes available.

Looking beyond these factors, the overall risks to activity are broadly balanced over the projection horizon. Downside risks largely emanate from possibly adverse trade effects related to geopolitical tensions. On the other hand, the labour market could exhibit even stronger dynamics than envisaged in this projection round, both in terms of employment and wages, resulting in stronger private consumption growth and hence output growth.

Risks to inflation are balanced over the project horizon. Upside risks to inflation could stem from renewed supply-side bottlenecks that could be triggered by ongoing geopolitical conflicts. Furthermore, wage pressures could be stronger than envisaged in the baseline. Unfavourable weather conditions and policies supporting the green transition - in particular those requiring heavy capital investment - could also push up inflation, although such effects might be temporary. On the downside, imported inflation could fall more rapidly than expected if the global disinflation process proceeds faster than assumed.

On the fiscal side, risks are deficit-increasing. These mainly reflect the likelihood of slippages in current expenditure, including higher-than-expected outlays on energy support measures if commodity prices are higher than assumed. They also reflect the likelihood of additional increases in pensions and public wages in the outer years of the forecast horizon. Should these risks materialise, they are set to be partly offset by the likelihood of additional fiscal consolidation to comply with the EU's fiscal rules.

This publication also includes two boxed articles. The first provides a detailed analysis of food inflation in Malta over the last three years. The second takes a closer look at developments and dynamics in goods and services inflation.

	2023	2024	2025	2026
GDP growth (% yoy)	5.7	4.4	3.5	3.4
Inflation rate (% yoy)	5.6	2.5	2.1	2.0
Unemployment rate	3.1	3.0	3.1	3.0
General Government budget balance (% of GDP)	-4.9	-4.1	-3.6	-3.1
General Government debt (% of GDP)	50.3	52.3	53.3	54.1

More details on the Bank's latest projections can be found here.

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