Maltese economy remains strong despite slowing growth

Malta maintained its position as one of the fastest growing Euro-area economies over the third quarter of 2016. GDP in the country grew by 3.0% compared to the same quarter in 2015, after 3.4% year-on-year growth the previous quarter.

This compares to the 0.9% growth in GDP achieved in the USA, 0.6% in the UK and 0.3% in the wider Euro-area.

This growth was mainly supported by net exports and dynamic labour conditions, supported by government efforts to increase labour market participation, which also helped boost private consumption.

Domestic demand pushed down real GDP significantly, however, as declines in investment and government consumption offset increases in private consumption expenditure, which grew by 3.1% over the quarter (Q2: 2.2%), and changes in inventories.

Industrial production in Malta fell by 3.0% year-on-year over the third quarter of 2016 after a 4.2% decline in the previous quarter.

The biggest drops in output were seen in the pharmaceutical, clothing and textile sectors, as well as the food industry. Lower production was also observed among manufacturers of computer, electronic and optical products and, to a lesser extent, in the beverages and energy sectors.

Conversely, firms involved in the printing and reproduction of recorded media as well as producers of rubber and plastics and fabricated metals saw their output rise compared to the previous year. Production also increased in the mining and quarrying sector, although this sector has a small share in overall industrial production.

Business confidence on the rise

Despite this, confidence in the industrial sector improved, swinging to +4 in the third quarter from -6 over the previous three months. This rise in confidence was driven by a favourable assessment of production expectations, despite being partially offset by persistently weak order books and above-normal stocks of finished goods.

The largest gains in confidence were registered among manufacturers of computer, electronic and optical products and within the repair and installation of machinery and equipment sub-sector.

Confidence in the construction sector also improved dramatically over the period, but still remains low. Indeed, the construction confidence indicator stood at -4 at the end of September, compared with -12 in the preceding quarter.

While well above its long-term average of -24, the overall construction confidence indicator has been negative for three consecutive quarters.

The retail and services sectors, however, experienced a decline in confidence over the period.

Confidence in the retail sector fell to 6 from 10, though this is still higher than the long-term average. Firms in this sector continued to express a favourable assessment regarding past and expected business activity, but these were both less positive than in previous quarters.

The fall in confidence was also driven by a small increase in the number of businesses reporting higher stock levels.

The services sector, meanwhile, saw confidence drop to 24 from 26, compared to a long-term average of 21. This fall in confidence over the third quarter was mainly driven by a decrease in past and expected demand, while firms’ assessment of their business situation was unchanged between the two quarters.

Inflation remains low as services prices fall away

Maltese inflation stood at 0.9% for the three months to the end of September, down from 1.0% at the end of June. This is higher than the 0.4% achieved in the Euro-area but still lower than historic levels.

The slight drop in inflation was driven by a fall in the price of services and non-energy industrial goods, as well as the cost of processed food. This all combined to mean that Malta’s competitiveness declines as unit labour costs grew faster than inflation.

The latest projections from the Maltese Central Bank have estimated a robust pace of expansion for the economy, although this is expected to slow-down over the coming years. Inflation, however, is expected to pick up over the same period driven on by rising international oil prices.

Labour market continues to grow

Labour market data shows continued growth in employment and a further decline in unemployment in the third quarter of 2016. The favourable developments seen in recent quarters partly reflect government efforts to increase labour market participation, but also the strong pace of expansion of the Maltese economy.

The Labour Force Survey revealed that the labour force grew by 1.9% over the third quarter of 2016 when compared to the same period in 2015, down from the 2.9% growth experienced over the course of the previous quarter.

Although employment continued to grow, the annual rate of change fell to 2.3% for the three months to the end of September, down from 3.5% in the second quarter.

During the third quarter of 2016 the total employment rate stood at 66.5%, with a year-on-year increase of 1.3 percentage points. Unemployment, meanwhile stood at just 4.8%, 0.1 percentage points lower than than in the preceding quarter.

As well as a growing demand for labour, the drop in unemployment since the beginning of 2014 has also been influenced by a range of measures aimed at reducing reliance on social benefits, as well as the extension of schemes that encourage training and re-skilling.