Central Bank of Malta: Outlook for the Maltese economy 2020-2022
Latest data suggest that the Maltese economy is likely to have recorded an unprecedented contraction in the second quarter of 2020, though there are signs of some stabilisation in the third quarter. Nevertheless, the Central Bank of Malta expects Malta’s Gross Domestic Product (GDP) to contract by 6.6% in 2020. Subsequently it should grow by around 6.1% and 4.2% in the following two years. While this projection is significantly better than that for other euro area countries, Malta’s level of economic activity is expected to be around 7% lower in 2022 compared to the projections that had been made prior to the outbreak of COVID-19. In fact, it will take until mid-2022 for Malta’s GDP to return to its 2019 level. Compared with the bank’s previous projections, GDP growth was revised downwards in 2020, due to weaker tourism exports that offset a stronger positive impulse from the fiscal measures that were announced in June. In total, government fiscal and liquidity measures are estimated to boost GDP by 3 percentage points, reducing the decline in GDP by a third.
The largest contributor to the projected decline in GDP in 2020 is net exports, reflecting an expected decrease in foreign demand, restrictions on travel-related activities and disruptions to the global supply chain. However, domestic demand is also expected to contribute negatively, as the shutdown of various activities during part of the year and the elevated uncertainty are expected to adversely impact private consumption and investment. Almost all sectors are expected to be negatively affected by the pandemic and the associated containment measures, but the accommodation and food services activities, transportation and storage, and wholesale and retail trade sectors, are expected to be the worst affected. Domestic demand is expected to be the main driver of the projected recovery in 2021 and 2022, although the net export contribution is also set to turn positive.
In view of the foreseen contraction in economic growth, employment is set to decline somewhat in 2020, leading to an increase in the unemployment rate. Fiscal measures are, however, expected to be supportive of the labour market and, hence, the expected losses in headcount employment are rather mild when compared with the foreseen decline in GDP. Moreover local labour market developments are much better than the trends observed in the euro area, with Malta registering in June – for the first time – the lowest unemployment rate in the monetary union. The labour market is expected to rebound in the following years, due to the projected improvement in economic activity levels.
In 2020, lower domestic and international price pressures should also lead toward an easing in annual inflation, from 1.5% to 0.9%, based on the Harmonised Index of Consumer Prices. However, inflation is also expected to be supported by cost-push factors, in the context of disruptions to the global supply chain. It is then set to edge up to 1.4% by 2022, reflecting a pick-up in economic activity, affecting prices of services and non-energy industrial goods inflation.
Public finances are expected to deteriorate in 2020 due to the expected decline in economic activity and the introduction of COVID-19 related support measures. The government balance is projected to be in deficit of 8.6% of GDP in 2020. As most COVID19 related measures are set to end this year, the shortfall is expected to narrow in 2021, and to stand at 3.5% of GDP by 2022. The government debt-to-GDP ratio is projected to rise from 43.7% in 2019 to 57.9% by 2022, thus remaining below the 60% reference value of the Stability and Growth Pact and well below the levels projected for the euro area.
Given the persistent uncertainty surrounding the pandemic, particularly in respect of timelines for the availability of a vaccine, the Central Bank of Malta has also published a more severe scenario in which health protocols in Malta and overseas would have to be enhanced and extended to contain the spread of the virus. In such a scenario, the contraction in GDP could reach 9.3% this year. GDP growth should then rebound to 5.5% and 3.7% in 2021 and 2022, respectively. In this case, the level of GDP would, by the end of 2022, remain below 2019 levels. Moreover, the unemployment rate would rise further and inflation would be slightly weaker. In addition, the government deficit would reach 11.3% in 2020 before narrowing to 5.4% in the following two years, while the government debt-to-GDP ratio would rise to 66% by the end of 2022.