Central Bank of Malta expects economy to contract by 6.6% this year as COVID-19 takes its toll

The latest Central Bank of Malta projections show that the economy will decline 6.6% this year and bounce back to a growth of 6.1% in 2021

The Central Bank of Malta projects a decline of 6.6% in GDP this year as a result of the COVID-19 pandemic
The Central Bank of Malta projects a decline of 6.6% in GDP this year as a result of the COVID-19 pandemic

The economy will contract by 6.6% this year but is expected to grow by 6.1% in 2021, the Central Bank of Malta said in its latest projections.

Weak tourism exports and low domestic demand caused by the COVID-19 pandemic are behind the projected decline in Malta’s GDP.

The CBM said the situation was made worse by increased uncertainty and disruptions to the global supply chain.

Accommodation and food services activities, transportation and storage, and wholesale and retail trade sectors, are forecast to be the worst affected.

However, domestic demand might provide the economy with a needed boost throughout 2021 and 2022 as economic activity stabilises.

Employment is expected to decline in 2020, but active labour market policies and fiscal measures are expected to soften the losses. The expected improvement in economic activity will further allow the labour market to rebound in the coming years.

Downward pressures from domestic and international prices should lead to a drop in annual inflation from 1.5% to 0.9%. but cost-push factors arising from global supply chain disruptions will push inflation back up to 1.4% by 2022 and help keep prices balanced. 

Between COVID-19 support measures and fiscal stimulus packages unveiled over the past months, public finances are expected to take a hit in 2020, with a projected deficit of 8.6% of GDP.

With most COVID-19 related measures ending this year, the deficit is expected to narrow down in 2021 and reach 3.5% of GDP by 2022. 

The government debt-to-GDP ratio is projected to rise to 57.9% by 2022, an increase of 14.2 percentage points from 2019. This is below the 60% benchmark required by the EU’s Stability and Growth Pact, and is considerably below the projected levels for the euro area.

More severe COVID scenario

The Central Bank of Malta made further projections for a more severe COVID-19 scenario, which could see GDP contract to a further 9.3%, remaining below 2019 levels at the end of 2022.

The government deficit would rise to 11.3% of GDP in 2020, with the government debt-to-GDP ratio rising above the Stability and Growth Pact benchmark at 66%. Unemployment would also see a further rise, with inflation slightly weaker.

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