The Central Bank of Malta (Bank) expects that Malta’s gross domestic product (GDP) will grow by 4.9% in 2021, by 5.4% in 2022, and by 4.7% in 2023. Compared to the Bank’s earlier projections, GDP growth is being revised marginally downwards by 0.1 percentage point in 2021 and 2022.
These marginal downward revisions are attributed to an expected weaker first half of 2021 – due to higher than anticipated containment measures – which we expect to be broadly offset by a stronger second half due to the very strong pace of vaccination, as well as an enhanced fiscal response. The Bank thus maintains its expectation that 2019 GDP levels are to be reached again in 2022.
Overall, domestic demand is expected to be the main driver of growth, though the recovery in all demand components will be partially absorbed by an increase in imports. Net exports are expected to exert a smaller negative impact on GDP growth in 2021, as foreign demand starts to recover, with a positive contribution thereafter. However, the outlook for the tourism sector remains cautious.
Despite the sharp contraction in economic activity in 2020, the labour market has shown remarkable resilience. Firms have generally been able to retain staff and have instead opted to reduce the number of hours worked. Thus, firms are expected to respond to an improvement in business conditions by returning to normal working hours. Employment growth is therefore set to decelerate to 0.9% this year, and pick up gradually in the following years, reaching 2.9% in 2023.
Annual inflation based on the Harmonised Index of Consumer Prices is set to edge down to 0.3% in 2021, from 0.8% in 2020, largely reflecting technical factors. Overall HICP inflation is set to edge up to 1.6% by 2023, reflecting a pick-up in economic activity, which is expected to lift prices of services and non-energy industrial goods further.
Fiscal policy is projected to remain highly expansionary in 2021, partly driven by the extension of COVID-19 related support. In 2021, the general government deficit is set to narrow slightly to 9.9% of GDP. The deficit is projected to narrow substantially over the forecast horizon as COVID-19 measures unwind and macroeconomic conditions improve further. By 2023, it is forecast to narrow to 4.2% of GDP. Consequently, the government debt-to-GDP ratio is projected to rise to 64.0% by 2023.
Risks to economic activity are broadly balanced in 2021 and slightly on the upside in 2022 and 2023. Private consumption could surprise on the upside due to pent-up demand and large accumulated savings. In addition, exports could surprise on the upside in case of a stronger pick up in tourism demand if Malta is able to increase market shares due to its high vaccination rate. On the downside, the pandemic situation might deteriorate if vaccines are less effective against new strains, hitting also foreign demand. With regards to prices, risks are judged to be on the upside, reflecting the possibility of faster transmission of the recent surge in transport costs to consumer prices. Risks to public finances are mainly deficit increasing and primarily reflect the need to provide State aid to the national airline.
This publication also includes two boxes. The first analyses the impact implications of the 2021 HICP weights on inflation forecasts, and the second updates the impact of COVID-19 fiscal and liquidity measures on GDP. The Bank estimates that the latter measures will boost GDP by 2.1 percentage points, effectively accounting for nearly half of the projected economic expansion in 2021.
More details on the Bank’s latest projections can be found here.