As a result of the pandemic, the Central Bank of Malta (CBM) expects that after an estimated contraction of 8.2 per cent in 2020, Malta’s gross domestic product (GDP), will grow by five per cent in 2021, by 5.5 per cent in 2022, and by 4.7 per cent in 2023.
The European Commission (EC), in its recent winter forecast projected that Malta’s economy will grow by 4.5 per cent in 2021 and 5.4 per cent in 2022.
Compared to the CBM’s projections published in December 2020, GDP growth is being revised downwards for 2020 and 2021 due to the impact of stringent containment measures that spilled further into 2021. It had projected Malta’s economy to contract by 7.5 per cent in 2020, now up to a contraction of 8.2 per cent, and it projected a 5.9 per cent 2021 growth rate, now down to five per cent.
However, GDP growth is being revised upwards for 2022 and 2023, with GDP in 2023 expected to be at a similar level to that projected in December 2020.
CBM thus maintains its expectation that 2019 GDP levels are to be recouped towards the end of 2022, conditional on the successful rollout of a vaccine in 2021.
Drivers of economic growth/contraction
Declining net exports were the main contributor to the contraction in GDP in 2020, reflecting a sharp drop in foreign demand, restrictions on travel-related activities, and disruptions to the global supply chain, the CBM noted.
However, domestic demand is also estimated to have contributed negatively, as the various containment measures curtailed various activities during the year, especially during the second quarter, and elevated levels of uncertainty which adversely impacted private consumption and investment.
Contractions in these two expenditure components were only partially mitigated by increased Government consumption. Domestic demand is expected to be the main driver of the projected recovery in subsequent years, the CBM observed,
Despite the sharp contraction in 2020, the labour market “has shown remarkable resilience”.
Unemployment initially rose during the first wave of COVID-19 but has since declined, as fiscal measures have been very supportive of employment. The COVID Government wage supplement is widely touted as having stabilised Malta’s workforce.
“Employment growth is estimated to have remained positive in 2020, though moderating compared to 2019. It is then projected to pick up gradually in the following years, reaching 2.7 per cent in 2023. These projections constitute an upward revision (by 0.2 percentage points) from the previous exercise, reflecting stronger than expected outcomes in 2020.”
Annual inflation based on the Harmonised Index of Consumer Prices is set to edge up to 0.9 per cent in 2021, from 0.8 per cent in 2020, reflecting faster growth in services prices, the CBM noted.
Furthermore, non-energy industrial goods (NEIG) inflation is set to turn positive. Overall HICP inflation is set to edge up to 1.7 per cent by 2023, reflecting a pickup in economic activity, which is expected to lift prices of services and NEIG further. Inflation forecasts are subject to a higher degree of uncertainty due to significant changes in weights of certain HICP components which were not yet available by the cut-off date. For 2021, these risks are assessed to be on the downside.
The CBM observed that public finances deteriorated sharply in 2020 due to the decline in economic activity and the introduction of COVID-19 related fiscal support.
The Bank is now projecting that the general Government will record a deficit of 9.5 per cent of GDP in 2020. The deficit is expected to persist throughout 2021, although it is anticipated to narrow to 6.6 per cent.
As economic activity improves and the need for COVID-related support gradually fades, the deficit is set to narrow further to 3.9 per cent of GDP by 2023. Consequently, the Government debt-to-GDP ratio is projected to rise from 42.4 per cent in 2019 to 60.3 per cent by 2023.
Given the prevailing uncertainty, the Bank has also published a more severe scenario in which it considers the effects of some restrictive health protocols being maintained beyond 2021, in the event that the pace of vaccination is slower than currently projected and new infectious strains become harder to control. In such a scenario, the 2019 level of GDP would be reached only in 2023.
Additionally, the Government deficit would deteriorate more sharply in 2021, reaching 10 per cent of GDP, before narrowing to 5.6 per cent in 2022 and 2023, while the Government debt-to-GDP ratio would rise to 68.2 per cent by then.