Malta Insights

TOURISM AND EXPORTS LIFT MALTESE ECONOMY IN 2022, BUT CHALLENGES ABOUND

A resurgence of tourism numbers and growth in domestic demand and services export have helped to lift the Maltese economy after the troublesome Covid-years, with expectations of a healthy growth by the end of the year.

Given Malta’s modest direct trade exposure to Russia and Ukraine, the war’s impact on the country’s economic development has been relatively contained. Real GDP growth is anticipated by the European Commission to reach 5.7% this year on the heels of a solid economic showing in the first half of 2022, supported by strong domestic demand and a significant boost from net exports. The latest NSO data has shown that the Gross Domestic Product (GDP) for the third quarter of 2022 amounted to €4,402.2 million, registering an increase of €456.1 million, or 11.6 per cent when compared to the same quarter of 2021. In volume terms, GDP rose by 5.2 per cent.

During the third quarter of 2022, Gross Value Added (GVA) rose by 14.4 per cent in nominal terms and 7.8 per cent in volume terms, when compared to the corresponding quarter of 2021. The drivers behind this 7.8 per cent growth was the services sector, which was mainly driven by the following sectors: accommodation and food service activities (40.6 per cent), administrative and support services activities (22.7 per cent), wholesale and retail trade; (9.2 per cent), Transportation and storage (15.0 per cent) and Information and Communication (8.0 per cent).

During the Summer season, which in travel terms is considered from April to October, 4.32 million passengers travelled through Malta International Airport. During this period, Malta International Airport was connected to 103 destinations, translating to a recovery of 82 per cent of its prepandemic summer connectivity. The seat load factor in October reached 86 per cent, marking an increase of 3.7 percentage points over pre-pandemic levels. Monthly seat load factors have been on the rise, compared to the pre-pandemic reference year, since May 2022.

Despite high levels of inflation, authorities have earmarked substantial funds to limit inflation by controlling the rise of electricity, gas, fuel and certain basic food prices. Energy and food subsidies are estimated to amount to EUR396 million by the end of 2022 (2.4% of GDP) and EUR605 million (3.5% of GDP) in 2023. This forecast is also backed by the Fitch credit rating agency, which late in November confirmed Malta’s A+ rating with a stable outcome, based on high per-capita income, a large net external creditor position and a pre-pandemic record of strong growth and sizeable debt reduction. Despite the intervention to keep energy prices stable, inflation in 2022 is expected to rise to 6.1%. Inflation is particularly high in imported goods, particularly food, transport, hospitality and housing services. These factors will continue to drive price increases in 2023, with inflation expected at 4.0%. At the same time, wage growth is expected to remain moderate.

Fitch did, however, note a recent deterioration in public finances with large fiscal deficits, which have led to a sharp increase in the moderate public debt burden. This could indeed be a risk to the economy in the months to come. The EC’s latest report sees the government debt-to-GDP ratio set to increase to 57.4% in 2022 and gradually reach 60.6% in 2024 as the primary balance remains negative and nominal GDP growth becomes less dynamic. By the end of October 2022, the Government’s Consolidated Fund reported a deficit of €613.4 million while Central Government debt stood at €8,738.0 million, an increase of €771.4 million from 2021.

In 2022, deficit levels are expected to reach 6%, decrease marginally to 5.7% of GDP in 2023 and more markedly to 4.4% in 2024.

THE JOB MARKET REMAINS STRONG

On the positive side, the employment market remained very strong. The seasonally adjusted monthly unemployment rate for October 2022 stood at 3.1 per cent. The unemployment rate during October 2022 for persons aged 15 to 24 years (youth unemployment rate) was 8.1 per cent while the rate for those between 25 and 74 years stood at 2.5 per cent. This situation is creating bottlenecks for many firms across the diverse economic sectors which continue to struggle to recruit the necessary resources for their operations. In a recent survey, 53% of respondents claimed that this situation was resulting in a “heavy impact on their business including serious disruption on their operations and stretched out resources”. A further 12% responded that the impact on their business was “severe” to the extent that business continuity was severely at risk. As job-seekers push new priorities in favour of flexible work arrangements, particularly postpandemic further exacerbate the challenge ahead for employers.

Malta’s unemployment rate is forecast to decline to 3.2% in 2022 and to further decrease to all-time lows in 2023 and 2024.

THE YEAR AHEAD

Looking forward to the next year, although forecasts do not share the doom and gloom envisaged for the wider European economy, a more challenging year ahead appears inevitable as the prolonged war takes

Inflation is expected to create further social challenges. According to the EU-SILC survey, which collects and produces statistics on Income and Living Conditions, in 2021 the at-risk-of-poverty or social exclusion rate was estimated at 20.3 per cent of the population living in private households in Malta.

it all on European economies. Indeed, higher prices, only ‘moderate’ wage growth and a challenging time for exporters await Malta in 2023.

Inflation is expected to create further social challenges. According to the EU-SILC survey, which collects and produces statistics on Income and Living Conditions, in 2021 the at-risk-of-poverty or social exclusion rate was estimated at 20.3 per cent of the population living in private households in Malta. Growth is forecast to moderate to 2.8% in 2023, as the supporting growth momentum of services exports fades and the impact of higher prices reduces household purchasing power and reaches 3.7% in 2024. Possibly in view of these expectations, the European Commission’s confidence surveys show that Malta’s economic sentiment edged down further in October when compared with a month earlier, and stood below its long-term average, which is estimated since November 2002. When compared with September, sentiment deteriorated across all sectors bar the retail sector, where it rose significantly, albeit from a low level.

Overall, export growth in 2023 is expected to weaken, as the general slowdown in economic performance among Malta’s trading partners starts to have a greater negative impact on the Maltese economy.