Maltas Economic Activity In 2022 Likely To Be 7% Below Pre-COVID-19 Forecasts

from CHAMBER LINK - The Official Business Newsletter

In a ‘more severe scenario” GDP contraction could reach 9.3 per cent this year

Economic activity in Malta is expected to be about 7 per cent lower in 2022 compared to the projections made prior to the outbreak of COVID-19, according to the Central Bank.

It is predicting that GDP will not return to 2019 levels before mid-2022.

The Central Bank said in a report released this morning that latest data suggest the Maltese economy is likely to have recorded an unprecedented contraction in the second quarter of this year, though there are signs of some stabilisation in the third quarter.

It expects the GDP to contract by 6.6 per cent in 2020 and then grow by about 6.1 per cent and 4.2 per cent in the following two years, noting this projection is significantly better than that for other euro area countries.

Compared with its previous projections, GDP growth was revised downwards this year due to weaker tourism exports that offset a stronger positive impulse from the fiscal measures that were announced in June. In total, Government fiscal and liquidity measures are estimated to boost GDP by 3 percentage points, reducing the decline in GDP by a third.

The largest contributor to the projected decline in GDP in 2020 is net exports, reflecting an expected drop in foreign demand, restrictions on travel-related activities and disruptions to the global supply chain.

The Central Bank also expects domestic demand to contribute negatively as the shutdown of various activities during part of the year and elevated uncertainty are expected to adversely impact private consumption and investment.

“Almost all sectors are expected to be negatively affected by the pandemic and the associated containment measures but the accommodation and food services activities, transportation and storage, and wholesale and retail trade sectors are expected to be the worst affected.

“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,” it noted.

Employment is set to decline somewhat in 2020, leading to an increase in the unemployment rate and lower domestic and international price pressures are likely to lead towards an easing in annual inflation, from 1.5 per cent to 0.9 per cent, based on the Harmonised Index of Consumer Prices.

Public finances are expected to deteriorate this year, with the Government balance projected to be in deficit of 8.6 per cent of GDP. The shortfall is expected to narrow in 2021 and to stand at 3.5 per cent of GDP by 2022.

The Government debt-to-GDP ratio is projected to rise from 43.7 per cent in 2019 to 57.9 per cent by 2022, thus remaining below the 60 per cent reference value of the Stability and Growth Pact, and well below the levels projected for the euro area.

In a “more severe scenario”, during which health protocols would have to be enhanced and extended, the contraction in GDP could reach 9.3 per cent this year and rebound to 5.5 per cent and 3.7 per cent in 2021 and 2022, respectively. In this case, the level of GDP would remain below 2019 levels by the end of 2022.

The unemployment rate would rise further and inflation would be slightly weaker. In addition, the Government deficit would reach 11.3 per cent in 2020 before narrowing to 5.4 per cent in the following two years, while the Government debt-to-GDP ratio would rise to 66.0 per cent by the end of 2022.