An assessment of the macroeconomic forecasts for the Maltese economy prepared by the Ministry for Finance in October 2015

Abstract

This report provides an assessment of the overall plausibility of the macroeconomic forecast prepared by the Ministry for Finance (MFIN) for the years 2015-2016 within the Draft Budgetary Plan (DBP) 2016, together with an assessment of the main assumptions which underpin the forecast estimates. This assessment recognizes that on the basis of the latest available information for 2015, the projected increase in the headline real Gross Domestic Product (GDP) figure of 4.2% for the current year may indeed be feasible. Like other institutions, primarily the Central Bank of Malta (CBM) and the European Commission (COM), the MFIN is expecting growth for 2015 to be higher than the rate registered for 2014 and to be mainly driven by the final domestic demand component of the economy. Of significant importance to the current short term forecasts for 2015 is the projected growth rate for gross fixed capital formation which is expected by the MFIN to remain a major driver of growth, supported by a number of public and private investment projects. However, the historical volatility of this component and the significant revisions noted in the investment expectations from one forecasting round to another introduce a certain element of risk which could impinge onto the attainment of the GDP growth rates in the DBP for 2016. Moreover, given the small size and openness of the local economy, developments within a single component of GDP will have a considerable impact on other areas of the local economy. In particular, the projected trajectory of the external sector for 2015 is expected to very much depend on the realization of the gross fixed capital formation component for the year.