The Central Bank of Malta (Bank) expects that Malta’s gross domestic product (GDP) will grow by 5.1% in 2021, by 5.9% in 2022, and by 4.7% in 2023. Compared to the Bank’s earlier projections, GDP growth is being revised upwards by 0.2 percentage point in 2021, and by 0.4 percentage point in 2022.
The upward revision in 2021 is driven primarily by stronger than previously expected private consumption and non-tourism exports, reflecting respectively improved consumer sentiment due to the higher vaccination rate, and higher foreign demand. These tailwinds are partly offset by weaker tourism exports than those envisaged in the June 2021 projection round. In addition, elevated labour shortages are assumed to limit the speed of recovery in 2021. The factors are expected to be less relevant in 2022 as progress with vaccination in trading partners should contribute to a recovery in travel flows. Hence, in 2022, GDP growth is being revised upwards more significantly than in 2021.
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 very cautious and has been revised down.
The labour market is expected to extend the resilience it displayed in 2020. However, employment growth is projected to be contained in 2021, in part as net migration flows remain constrained by ongoing travel restrictions. Working hours are envisaged to gradually return to normal. Employment growth is therefore set to decelerate to 1.1% this year, and pick up gradually in the following years, reaching 2.9% in 2023. Unemployment is projected to fall to 3.5%, which would mark a new record low for Malta. Wage growth is set to rise significantly over the projection horizon and exceed inflation consistently.
Annual inflation based on the Harmonised Index of Consumer Prices is set to decrease to 0.5% in 2021, from 0.8% in 2020, largely reflecting technical factors. Overall HICP inflation is set to increase to 1.8% 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 remainder of the forecast horizon as COVID-19 measures unwind and macroeconomic conditions improve further. By 2023, it is forecast to narrow to 4.1% of GDP. As a fiscal deficit is expected to prevail throughout the forecast horizon, the government debt-to-GDP ratio is projected to rise to 63.8% by 2023.
On balance, risks to economic activity are judged to be on the upside. In particular, the saving ratio is at historical highs and is assumed to remain above pre-pandemic levels until 2023. A faster decline in the saving ratio – also spurred by pent-up demand – could lead to faster than expected growth in economic activity. On the other hand, tourism remains a downside risk, and uncertainty is expected to prevail for an extended period.
Risks to inflation 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 elaborates on tourism projections adopted in this forecast round. It shows that tourism exports are projected to remain well below 2019 levels this year. These are then expected to recover gradually over the next two years but remain below pre-pandemic levels. The second box compares the Bank’s latest GDP projections with those of other institutions and indicates that the Bank’s forecasts are close to the median of these projections.
More details on the Bank’s latest projections can be found here.