Outlook for the Maltese economy 2020-2023

In the light of the pandemic situation, which has continued to develop during recent months, the Central Bank of Malta (the Bank) expects Malta’s gross domestic product (GDP) to contract by 7.5% this year, and subsequently to grow by 5.9% in 2021, by 4.4% in 2022, and by 4.2% in 2023. The downward revision of the Bank’s forecasts reflects the re-introduction of containment measures and renewed signs of deterioration in business sentiment, which are expected to dampen the global economic recovery in the near term. Nonetheless, the Bank expects 2019 GDP levels to be re-attained and exceeded in 2022, conditional on the successful rollout of a vaccine in 2021.

The decline in net exports is projected to be 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. However, domestic demand is also expected to contribute negatively, as the shut-down of various activities during part of the year and elevated levels of uncertainty adversely impacted private consumption and investment. However, increased government consumption partly offset the fall in private demand.

Domestic demand is expected to be the main driver of the projected recovery in the following years even though government assistance measures are expected to be reduced gradually.

Despite the sharp contraction in 2020, the labour market has so far shown remarkable resilience. Unemployment initially rose during the first wave of COVID-19, but has since declined, as fiscal measures have been very supportive in this respect. Hence, employment growth is set to remain positive in 2020, though it will moderate from 2019. It is then expected to pick up gradually in the following years, reaching 2.5% in 2023. These forecasts constitute an upward revision from the previous set of projections.

Annual inflation based on the Harmonised Index of Consumer Prices is set to ease to 0.8% this year, down from 1.5% in 2019, reflecting lower domestic and international price pressures. However, these downward pressures are mitigated in part by cost-push factors, in the context of disruptions to the global supply chain. Inflation is set to edge up to 1.6% by 2023, reflecting a pick-up in economic activity which should lift prices of services and non-energy industrial goods inflation.

Public finances are expected to deteriorate 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 9.4% of GDP in 2020, having revised its economic growth projections downwards from what was previously expected. In its budget for 2021, the Government will be extending some COVID-related measures. The deficit is therefore expected to persist through 2021, although it is expected to narrow to 6.4%. As economic activity improves and COVID-related support is tapered off, the deficit is set to narrow further to 4.0% of GDP by 2023. Moreover, the government debt-to-GDP ratio is projected to rise from 42.6% in 2019 to 60.5% by 2023.

Given the prevailing uncertainty, the Bank has also published a more severe scenario in which it considers the effects of maintaining some restrictive health protocols beyond 2021. In such a scenario, the contraction in GDP could reach 9.4% this year. GDP growth should then rebound to 5.5% in 2021, before moderating again to 3.7% and 3.6% in the following two years. In this scenario, the 2019 level of GDP would be exceeded only in 2023. Additionally, the government deficit would deteriorate more sharply in 2021, reaching 9.8%, before narrowing to 5.5% by 2023 while the government debt-to-GDP ratio would rise to 68.6% by then.

This publication includes three boxes.

• Box 1 computes a composite indicator which summarizes COVID-19 measures in Malta, based on the Oxford COVID-19 Government Response Tracker (OxCGRT).
• Box 2 outlines the reasons behind the relative resilience in inflation during the COVID-19 pandemic.
• Box 3 assesses the Budget 2021 targets, outlining how fiscal forecasts have evolved since the outbreak of the pandemic.

More details on the Bank’s latest projections can be found here.