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A round-up of the Maltese economic landscape: Quarter 3| 2022
Malta GDP for Q3 of 2022 reached € 4.4 b (in nominal terms), an 11.6% increase over the same quarter in 2021. Tourist arrivals also picked up over the summer months (though still remaining below pre-COVID levels). Inbound tourists during the first 9 months of 2022 amounted to 1.7 million, while total expenditure per capita amounted to €896 (a decrease of c. 9% over the same period in 2021)[1].
Supply-chain disruptions and inflationary cost pressures remain, with the latter partly mitigated through Government energy and cereal subsidies. A counterfactual analysis undertaken by the Ministry for Finance reveals that in the absence of such support, a significantly higher inflation rate (+7.1 p.p) would negatively impact aggregate demand, resulting in a 2.3 p.p. decline in real GDP compared to baseline growth[2].
In July 2022 EU countries, including Malta, faced the highest Interest rate hikes since 2011. With the inflation crisis now in its second year, interest rates by the ECB have risen again by an additional 75 basis points - in September and November 2022 – with main refinancing operations, interest rates on the marginal lending facility, and the deposit facility reaching 2.00%, 2.25% and 1.50%, respectively.[3]
So far, local business conditions continue to remain stable, with higher activity being recorded in 2022-Q3. The output gap, which identifies the current economic position over the business cycle, is estimated to have widened, as a result of over-utilisation of the economy’s productive capacity as the economy strongly recovered in the context of labour shortages and other supply bottlenecks[4].
Looking ahead, GDP is forecasted to grow by 5.7% in 2022[5], driven by robust domestic demand and a strong positive contribution from net exports (mainly tourism). To further realize and sustain growth, investments in tourism need to holistically capture the entire ecosystem. Whilst tourism recovery continues, the industry itself highlights that more connectivity is needed to reach 2019 levels, especially towards the UK[6].
Within the EU, there are growing signs of a recession, including within the Eurozone. Europe’s powerhouse, Germany, is seeing a weakening economy that could represent a major challenge for other European economies, leading to risks of stagflation. At the same time, driven by both worsening global container demand and easing of supply chain and port congestions, a forecasted unwinding of freight rates into 2023 is welcome news for importers, especially in a small island state like Malta, heavily dependent on logistics and transportation chains for imports[7].
A deep dive into the interest rate movements and impacts ...
As from March 2022, a number of central banks, including the Fed and the ECB, have embarked on a monetary tightening policy stance by increasing their reference interest rates and reducing their earlier Asset Purchase Programmes. Higher rates can control inflation (central banks’ often publicly stated main objective) by making it more expensive to borrow, spend and invest, thereby lowering aggregate demand for consumption, investment, and imports, and thereby GDP.
This concerted effort to curb inflation via interest rates is, however, raising concerns about their impact on economic growth, on the causes of inflation (cost-push, not demand-pull) requiring a different type of remedy package, and on the impact on different commodities and asset classes. Years of low rates had pushed investors toward riskier holdings, a process that is now going into reverse, while rising rates can lower the value of certain existing holdings. What do we know about how certain asset classes can be impacted?
- Cash: cash and cash-like equivalents (e.g. savings) benefit from higher interest rates on deposits.
- Bonds: investors in long-duration bonds are stuck holding a lower-yielding asset (i.e. bond prices go down) as interest rates increase.
- Equity: higher interest rates could see increased volatility and cost of borrowing, leading to price declines (not as much as bonds), with some investors selling off their holdings.
- Commodities: these tend to fall in price because of an increase in cost associated with holding inventories (oils, minerals, agriculture), or because of increased competition from higher-yielding investments (silver, gold). At the same time, the current energy crisis seems to indicate otherwise.
- Real estate: home ownership can become less affordable as mortgage interest payments rise, whilst income from rental property is likely to increase.
Locally, banks could be seen initially cushioning the impact of higher interest rates. In fact, interest rate increases by the ECB did not automatically translate into equal changes to the rates charged by banks. Local banks’ future base rate will be shaped by the overall size and pace of the ECB’s interest rate decisions, especially if interest rates remain high over the medium to long term.
Central bankers and other economists highlight the need for further interest rate hikes. Some analysts foresee only a half-point increase (i.e. 50 basis point increase) at the next rate-setting meeting in December 2022, after which the ECB is expected to take a pause. Currently above 10% in the Euro Area, the ECB predicts inflation will only fall to 2.3% by the end of 2024.
By comparison, the Fed is also expected to lift rates by 50 basis points, but peak policy rate may be higher[1]. US monetary tightening has had strong spill-overs on the rest of the world through the high level of the dollar. Indeed, the EUR-USD exchange rate must be kept in check - a weaker euro worsens inflation by raising the price of imported goods, whilst pushing hot money out of Europe into investments priced in dollars. According to ING, EUR-USD could be trading in a 0.95-1.05 range for most of 2023[2].
Reigning in inflation could, however, come at the cost of weakening output growth. Leading economists are in fact pencilling in a recession for the end of this year and the beginning of next year in both the US and the Eurozone countries. IMF forecasts that global economic growth will slow from 3.2% this year to 2.7% next year.
Cut-off date: 29 Nov 2022
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
Chris Meilak
Partner
Valuation, Modelling and Economics
chris.meilak@mt.ey.com
Orlanda Grech
Manager
Valuation, Modelling and Economics
References
[1] NSO (2022), NR 202/2022
[2] Ministry for Finance and Employment (2022), Pre-budget Consultation document 2023
[3] ECB (2022), Key ECB interest rates. Available at: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
[4] CBM (2022), Central Bank of Malta Business Dialogue Publication – Fourth Edition of 2022. Available at
[5] EC (2022), Economic forecast for Malta. Available at https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/malta/economic-forecast-malta_en
[6] Travel Weekly (2022), The Personal Travel Agents ‘vital’ to Malta’s npandemic recovery. Available at
[7] Maersk (2022), Interim Report Q3 2022
[8] (Charts note) Government deficit is representing the Consolidated Fund Deficit.
[9] (Charts note) Government debt is representing the Total Central Government Debt.
[10] Reuters (2022), Fed to lift rates by 50 basis points, but peak policy rate may be higher. Available at https://www.reuters.com/markets/rates-bonds/fed-lift-rates-by-50-basis-points-peak-policy-rate-may-be-higher-2022-11-18/
[11] ING Think (2022), G10 FX Outlook 2023: Less trend, more volatility. Available at
Chart References
[i] National Statistics Office (2022), Gross Domestic Product: Q3/2022.
[ii] National Statistics Office (2022), Gross Domestic Product: Q3/2022.
[iii] National Statistics Office (2022), Inbound Tourism: September 2022.
[iv] Pre-Budget Consultation Document 2023.
[v] National Statistics Offices (2022), Government Finance Data: January - October 2022.
[vi] National Statistics Offices (2022), Government Finance Data: January – October 2022.
[vii] National Statistics Office (2022), Retail Price Index (RPI): October 2022; National Statistics Office (2022), Harmonised index of Consumer Prices: October 2022.
[viii] National Statistics Office (2022), Unemployment Rate: October 2022.
