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A round-up of the Maltese economic landscape: Quarter 2| 2022
Where we came from
Moving into Quarter 2 of 2022, the war against Ukraine and ensuing sanctions imposed on Russia continued to hit the economies around the globe. Elevated commodity prices, higher energy prices due to alternative energy sourcing, rising transportation costs, supply bottlenecks, disruptions in supply chains, and tighter financial conditions resulting from higher inflation are some of the repercussions witnessed[i]. Locally, Maltese authorities have committed to continue limiting energy price jumps in 2022[ii], yet core inflation persists. At the same time, with rebounds in domestic demand, the COVID-19 wage supplement scheme came to an end in May 2022, costing €720 million (m) since March 2020[iii]. In June, following an earlier on-site visit, Malta was also voted off the FATF grey list[iv], one year after it was put under such scrutiny. The easing of COVID-19 travel restrictions has fuelled the “revenge travel” trend in the travel and tourism industries, as this second quarter gave way to the start of the peak travelling season.
Current outlook
8 months into the year, GDP is forecasted to grow by 5.4% in 2022, reflecting a lower contribution from domestic demand (a downward revision of 0.6% compared to previous projections)[v] . Such forecast does not take into account the ECB’s decision to raise interest rates by 0.25% in July, for the first time in more than 11 years – a trend which is expected to continue until inflation across the Eurozone reverts to its 2% target[vi]. National debt was narrowed by €360m in the first half (H1) of 2022, standing at €8.4 billion(b), whilst a deficit of €462.6m was recorded by the end of June 2022[vii].
In the meantime, the Malta Development Bank has put in place a €150m Liquidity Support Guarantee Scheme in the face of the current outlook – for firms affected by the Ukraine crisis (LSGS-A)[viii], and for fuel and oil importers (LSGS-B) . At the same time, Malta has been exempted from the EU’s plan for mandatory reduction of gas use, agreed towards the end of July. Nonetheless, inflation concerns are also increasingly being linked to issues of national food security, as also voiced locally by stakeholders[ix].
Against the above, the rebound demand for travelling is supporting the global and local economy, especially as twin-centre destination trips, with Malta being combined with other travelling destinations, are picking up in trend. Yet, labour shortages and limited airport/ airline carrying capacity, as well as airport connectivity, are leading to chaotic summer travels – making the future scenario of tourism exports look further depressed[x].
Going forward, local economic growth will be further supported via the Multinational Financial Framework (MFF) for 2021-2027, where €2.25b of the EU budget were allocated to Malta [xi] - €316.4m of which channelled through the Recovery and Resilience Fund (RRF), with specific focus on digitalisation and energy efficiency-related projects[xii].
A deep dive into...
Inflation [xxi]
Latest annual inflation figures for June 2022 show a rate of 6.1% as per the RPI and 6.2% as per the HICP for Malta – compared to 5.8% and 6.0% respectively in May. In the Euro Area, the average inflation figure stands at 8.6% (from 8.1% in May), with Malta holding the lowest figures, followed by France (6.5%). This sharp increase is due to an increase in prices across all sub-components of headline inflation, especially energy (42.0%) and food, alcohol and tobacco (8.9%). As a matter of fact, this war-fuelled inflation already means natural gas has increased by some 700% in Europe since the start of last year, threatening further waves of inflation. Locally, the main HICO drivers are: food and non-alcoholic beverages (10.2%) and housing, water, electricity, gas and other fuels (9.0%), followed by recreation and culture (7.3%). Energy inflation remains subdued as fuel and electricity price hikes are cushioned via government subsidies (confirmed at least till the end of this year).
Nonetheless, food inflation remains a key thematic, as households and businesses alike are feeling the pinch. Locally, restaurants are facing rise in prices for raw materials and essential foodstuffs, which is hindering the sustainability of the industry[xxi]. The acceleration in food inflation is being driven by bread, fruit and vegetables as well as meat - prices of bread and cereals indeed rose by 9% during the first four months of 2022.
Looking ahead, annual HICP inflation in Malta is projected to accelerate to 5.0% in 2022, from 0.7% in 2021. In the EU, HICP is forecasted to start declining towards the end of 2022 (6.8%), further to 3.5% in 2023, and 2.1% in 2024. Energy and food inflation are expected to start moderating in 2023, as the pressure on such prices are expected to subside. Yet, one is to also keep in mind that we are entering a new age of energy inflation, as highlighted by the ECB, where we will become accustomed to new terms as ‘climateflation’, ‘fossilflation’, and ‘greenflation’.
By way of response measures, price controls, cost-of-living adjustments, and adjustments to the monetary policies of central banks have almost become the order of the day. Businesses are reviewing operations to introduce diverse and flexible supply chains, re-engineering their capital structures, as well as accelerating investment in property, plant and machinery – whilst locking in long-term contracts with key suppliers to further guard off eventual price increases.
Cut-off date: 1 Aug 2022
Tourism [xxii]
The tourism sector undoubtedly faced major challenges in the past couple of years; finally, summer 2022 is being seen as the start of a recovery period. In 2021, tourist arrivals in Malta increased by 47% year-on-year, reaching just under 1m tourists. Despite this increase, the number of tourist arrivals remained well below the pre-pandemic levels of 2.7m tourists (2019). However, in June 2022, about 600k passengers have already travelled through MIA, increasing significantly from c. 191k passengers in June 2021 (+c.200%); this is still below pre-pandemic figures of c. 722k for June 2019. Italy is leading the way in terms of market share since April 2022, followed by the UK and Germany. In May 2022, overnight cruise passengers amounted to 5,700, up from pre-pandemic levels (3,600 in May 2019). Cost and operational concerns remain (e.g. jet fuel prices; staff shortages; airport connectivity; fleet downsizing; short booking and planning cycles), potentially clogging parts of the industry.
Going forward, the national Tourism Strategy for 2021-2030 aims to form the basis of a wide discussion to provide the local tourism industry a sound platform from which to recover the losses inflicted by the pandemic, and take decisive steps to strengthen tourism’s economic and social contribution. The quest is deeply ingrained in the sector but is challenging – finding the right balance between the need for volumes, and providing a higher quality product.
EY Malta - Economic Advisory Services
EY’s Economic advisory services provides a full suite of economic services, helping both public and private sector clients understand the current and future environments they operate in, and facilitating scenario planning and decision-making. Our services include:
- Cost benefit analysis and project appraisals
- Economic impact analysis
- Regulatory and policy economics
- Consumer demand analysis
- Urban economics
- Socio-economic and regional development
- Market structure and competition
- Modelling and forecasting
Contact:
Chris Meilak
Partner
Valuation, Modelling and Economics
chris.meilak@mt.ey.com
Orlanda Grech
Manager
Valuation, Modelling and Economics
orlanda.grech@mt.ey.com
References
[i] IHS Markit (2022), Russia-Ukraine war and inflation; The World Bank (2022), Russian Invasion to Shrink Ukraine Economy by 45% this year; Forbes (2022), Long-Term Economic Effects of the Ukraine War.
[ii] ToM (2022), Malta Expected to Have Lowest EU Inflation this year.
[iii] Government of Malta (2022), Press Release By the Ministry for the Environment, Energy and Enterprise – Wage supplement support set to exceed €720 million (PR220524en).
[iv] ToM (2022), Malta removed from FATF grey list.
[v] Central Bank of Malta (2022), Outlook for the Maltese Economy.
[vi] CBS (2022), Europe’s central bank to hike interest rates for first time in 11 years; BBC (2022), Eurozone interest rates set to rise for first time in 11 years; RTE (2022), ECB to raise interest rates by 0.25% in July, and end bond-buying programme.
[vii] NSO (2022), Government Finance Data: January – June 2022.
[viii] ToM (2022), €150 million in loans to be made available to firms hit by supply chain crunch.
[ix] Malta Today (2022), Farmers debate food security at first-ever AgriFair.
[x] Forbes (2022), Traveling to Europe? Beware of Flying Chaos: Flight Cancellations, Delays, Lost Luggage – and it’s Just Starting.
[xi] Government of Malta (2020), Press Release by the Office of the Prime Minister – Exceptional Result for Malta in the Multiannual Financial Framework (MFF) 2021 – 2027 and the Recovery Instrument – The largest ever allocation earmarked for Malta - €2.250 billion (PR201382en).
[xii] The Independent (2022), €35m from Recovery and Reslience Fund for digitalisation and energy efficiency projects.
[xiii] National Statistics Office (2022), Gross Domestic Product: Q1/2022.
[xiv] National Statistics Office (2022), Gross Domestic Product: Q1/2022.
[xv] National Statistics Office (2022), Inbound Tourism: May 2022.
[xvi] The Independent (2022), Updated: Wage supplement scheme extended to May.
[xvii] National Statistics Offices (2022), Government Finance Data: January - June 2022.
[xviii] National Statistics Offices (2022), Government Finance Data: January - June 2022.
[xix] National Statistics Office (2022), Retail Price Index (RPI): May 2022; National Statistics Office (2022), Harmonised index of Consumer Prices: May 2022.
[xx] National Statistics Office (2022), Unemployment Rate: May 2022.
[xxi] Central Bank of Malta (2022:2), Outlook for the Maltese Economy; National Statistics Office (2022), Retail Price Index (RPI): May 2022;National Statistics Office (2022), Harmonised index of Consumer Prices: May 2022; Eurostat (2022), Inflation in the euro area; The Independent (2022), Government refuses to reveal amount spent on energy subsidies; Malta Today (2022), Restaurants fear inflation’s paralysis as stock prices rise in the shadow of war; Malta International Airport (2022), June 2022 Malta International Airport Statistics; Express (2022), Gas price surge: Costs skyrocket to 4 times higher than last year as Putin limits supplies; Bloomberg (2022), Natural Gas Soars 700%, Becoming Driving Force in the New Cold War; MaltaToday (2022), Fuel cushion ensures Malta retains lowest Eurozone inflation rate in June; Malta Today (2022), Restaurants fear inflation’s paralysis as stock prices rise in the shadow of war; ECB (2022) Eurosystem staff macroeconomic projections for the euro area – June 2022.
[xxii] Malta International Airport (2022), June 2022 Malta International Airport Statistics; The Independent (2022), Watch the blossoming of a tourism flower; ToM (2022), Just under one million tourist visited Malta in 2021; Ministry for Tourism and Consumer Protection (2021); Malta Tourism Strategy 2021 – 2030 – Recover, Rethink, Revitalise; ToM (2022), Malta’s airport connectivity is lowest in Mediterranean.
