News Maltese economy to be severely affected by the outbreak of COVID-19

The Central Bank of Malta expects economic growth to be severely affected by the outbreak of COVID-19 and the containment measures imposed by governments worldwide to stem the spread of the virus.

Given the high uncertainty surrounding the evolution of the pandemic, the bank is presenting two scenarios, a baseline and a more severe scenario.

In the baseline scenario, which accounts for a situation in which containment measures are at least partially successful, GDP is projected to contract by 4.8% in 2020 and grow by around 5.8% and 4.2% in the following two years. Despite the projected recovery, the level of economic activity is expected to be around 6% lower than that expected prior to the outbreak of COVID-19.

Under the baseline scenario, the largest contributor to the decline in GDP in 2020 is net exports, reflecting an expected decline in foreign demand, restrictions to travel-related activities and disruptions to the global supply chain. Domestic demand is also expected to contribute negatively, as the shut-down of various activities and elevated uncertainty is expected to adversely impact private consumption and investment. Going forward, domestic demand is expected to be the main driver of the projected recovery in 2021 and 2022.

In view of the foreseen contraction in economic growth, employment is set to decline in 2020, leading towards 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. The labour market is then 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, based on the Harmonised Index of Consumer Prices. However, in the short-run, inflation is expected to be impacted by costpush factors, in the context of disruptions to the global supply chain. It is then set to edge up to 1.5% 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 measures. In the baseline scenario, the government balance is projected to be in deficit of 6.8% of GDP in 2020. As most COVID-19 related measures are set to end this year, the deficit is expected to narrow in 2021 and to stand at 2.9% of GDP by 2022. Government debt-toGDP ratio is projected to rise from 43.7% in 2019 to reach 55% by 2022.

In the severe scenario, it is assumed that the health protocols would have to be enhanced and extended to contain a second wave of infections. We estimate that the GDP could contract by 8.3% this year and rebound by 6.8% and 3.8% in 2021 and 2022. In this case, the level of GDP would be around 9% lower than our March projections and would only reach 2019 levels by the end of 2022.

Moreover, the unemployment rate would rise further and inflation would be slightly weaker. In addition, the government deficit would reach 10.4% in 2020, while the government debt-to-GDP ratio would rise to 63% by the end of 2022.