Malta GDP expected to contract by 6.6%, will not return to 2019 levels until mid-2022 – Central Bank
Malta’s gross domestic product is expected to contract by 6.6% in 2020 and will likely not return to the level it was at in 2019 until mid-2022, the Central Bank of Malta has said.
Publishing its latest outlook for the Maltese economy, the Central Bank said that the “latest data suggest that the Maltese economy is likely to have recorded an unprecedented contraction in the second quarter of 2020”, though it noted that there are signs of some stabilisation in the third quarter.
Nevertheless, the Central Bank said that it expects Malta’s 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,” the outlook read.
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.
The outlook noted that government’s fiscal and liquidity measures introduced to combat the economic effects of the COVID-19 pandemic are estimated to boost GDP by 3%, hence reducing the decline in GDP by a third.
The Central Bank identified net exports as the largest contributor to the projected decline, 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, with almost all sectors expected to be negatively affected by the pandemic and associated containment measures.
“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,” the outlook read.
“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,” it continued.
“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.”
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 COVID-19 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 said that it 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-toGDP ratio would rise to 66% by the end of 2022.