Malta’s economy set to grow by 4.5% this year, European Commission forecast shows

Malta’s economy is forecast to grow by 4.5% this year, the fourth highest in the EU, according to the European Commission’s Winter Forecast released today.

The return to growth comes on the back of a severe contraction last year when the economy shrunk by 9% as a result of COVID-19 pandemic restrictions.

“The expected rollout of vaccinations in 2021 and a gradual easing of restrictions in the EU should set the tourism sector back on the path to recovery and re-invigorate domestic demand. In 2021, real GDP growth is expected to reach 4.5%,” the Commission said. 

In 2020, the Maltese economy took the third largest hit in the EU as a result of limitations on air traffic, tourism and social activities.

The Commission said the negative impact was partially mitigated by government stimulus measures.

“Investment fell, mainly due to a surprise drop in construction, while private consumption was dampened by contractions in sectors such as retail and hospitality. The toll on the economy, however, has been partially mitigated by government stimulus measures. The second wave of restrictions globally has placed additional strain on the highly open economy in the last quarter of 2020 and continues to weigh in the first quarter of 2021,” the Commission said.

The forecast for this year removes the negative impact of Brexit assumed last autumn when it was unclear whether the EU and UK would reach a free trade agreement. The agreement was reached in extremis.

The 2021 Winter Forecast does not include the impact of the Next Generation EU programme, which will likely improve the growth outlook.

In 2022, Malta’s economy is forecast to expand by 5.4% as net exports return as the main contributor to GDP growth while domestic demand makes a slower but steady contribution.

By the end of 2022, the tourism sector is expected to recover close to pre-pandemic levels and international trade should be significantly restored, the Commission said.

Inflation averaged 0.8% in 2020, lower than the 1.5% in 2019, driven mainly by subdued energy prices and lower inflation in services, against the background of the contraction in demand.

In 2021, inflation is expected to rise to 1.3% on the back of recovering domestic demand and a higher demand for tourism services. In line with a stronger economic recovery in 2022, inflation should pick up further to around 1.6%.