Malta’s economy shrunk severely last year, but is expected to grow by 4.5 per cent this year, the fifth-fastest in the EU, the European Commission forecast on Thursday.

In its winter forecast, the commission said limitations on air traffic, tourism and social activities were mainly to blame for an expected fall in real Gross Domestic Product of around nine per cent, the third-largest in the EU. The blow came right after robust growth of 5.3 per cent in 2019. 

But by 2022, Malta’s economy, together with that of Slovakia’s is forecast to expand by 5.4 per cent, the highest in the EU, where an average of 3.9 percentage change in the GDP over 2021 is expected. 

In a tweet, Prime Minister Robert Abela hailed the EU’s forecast that Malta will have the fastest GDP growth in the EU next year. 

@EU_Commission forecasts #Malta will have the fastest GDP growth rate in the #EU next year. Together as #Team Malta ?? we defended #lives and #livelihoods, now it is time to launch our new #prosperity. - RA

— Robert Abela (@RobertAbela_MT) February 11, 2021

The forecast comes one day after Moody's on Wednesday predicted growth to rebound to 5.1 per cent of GDP this year. However, it warned this relied on tourism arrivals being substantially higher in the second half of 2021 when compared to 2020, particularly during the summer peak season.

On Thursday the commission noted that in 2020 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 COVID jabs offer some hope.

The commission said that the expected rollout of vaccinations this year 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 per cent, mainly driven by net exports and domestic consumption, as inbound tourism and global trade recover gradually. 

According to the commission, the EU-UK Free Trade Agreement reduced, in part, the negative impact assumed by the World Trade Organisation-rules based assumption in the autumn forecast. 

Back then the commission had said it did not see the economies of member states returning to normality before 2022 but expected Malta to experience a modest recovery in 2021 and 2022. 

Its autumn forecast was more or less in line with what it had predicted in summer and had acknowledged that the COVID pandemic was having an acute impact on critical sectors of Malta’s economy including tourism and external trade, leading to a temporary increase in the unemployment rate.

In its winter forecast issued on Thursday, the commission said the potential growth impact from policy measures related to the Next Generation EU programme were not yet included in its latest prediction. 

Under this programme, Malta has been allocated at least €1.1 billion in grants and loans withing the Recovery and Resilience Facility, meant to help member states recover from the pandemic. 

Next year, Malta’s economy is forecast to expand by 5.4 per cent 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.

Number of nights spent reported via Eurostat, augmented by nowcasts based on AirBnB-reviews for the month indicated until Dec 2020. Photo: European Commission

European economy recovered in third quarter

Economic activity bounced back strongly in the third quarter of 2020 as containment measures were lifted but failed to recover fully. 

Just as the crisis brought about by the pandemic was broad-based but uneven, so was the bounce-back. States that saw activity fall more sharply in the first half of the year, enjoyed stronger increases in the third quarter. 

While this vigorous rebound helped to close two-thirds of the output loss incurred in the first half of the year, it left real GDP about 4.25 per cent below its pre-crisis levels in the EU and the euro area. 

The gap compared to pre-crisis levels was highest in Greece (about -12 per cent), Croatia (-1.25 per cent), Malta and Spain (both close to 9 per cent), reflecting the stronger reliance of these countries on tourism. 

It was the smallest in Poland, Finland and Lithuania.

Harmonised Indices of Consumer Prices

Harmonised Indices of Consumer Prices inflation averaged 0.8 per cent in 2020, lower than the 1.5 per cent 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 per cent 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 per cent.

Gross domestic product, volume (percentage change on preceding year, 2002-2022). Photo: European Commission