Over the past few years, Malta’s economy has grown at a relentless yet sustained pace, characterised by fast GDP and employment growth, propelled by a strong services sector. This positively impacted public finances as the deficit and rising debt were reversed, with fiscal surplus and declining debt ratios being

However, 2019 data had already started indicating that the economy was reaching its peak, with GDP growth in real terms in 2019 hovering around 4.4%, moderating from the 6.9% average reported in the previous two years.

The figures emerge from a study carried out by Seed Consultancy, in conjunction with Times of Malta, right after Monday's budget speech.

Latest statistics suggest that the Maltese economy has recorded an unprecedented contraction of 16.2% in the second quarter of 2020, when compared to the same quarter last year. Sectors such as wholesale and retail trade and hospitality have been the worse hit, shrinking by 30% during the first half (H1) of 2020. Gaming, ICT and financial services were the only sectors to register signs of growth.

Malta’s short-term economic trajectory is still highly uncertain, with signs of recovery contingent on the size and duration of the pandemic, the economic
recovery of Malta’s trading partners and how quickly domestic consumers’ confidence rebounds. As it stands today, Malta’s GDP in the first six months of
2020 is at par with levels registered back in 2017.

The Central Bank of Malta expects Malta’s GDP to contract by 6.6% in 2020, growing by around 6.1% and 4.2% in the following two years. While this projection is significantly better than that of other EU member states, it is expected to take until mid-2022 for Malta’s GDP to return to 2019 levels.

Expenditure patterns

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

On the domestic front, household consumption and private investment have both been adversely affected, amidst the complete shutdown of various activities and heightened levels of uncertainty, leading to an increased preference for saving rather than spending or investment.

The declines reported in restaurants and hotels, transport, recreation and culture are mostly explained by the sudden drop in tourist arrivals resulting from the travel restrictions imposed worldwide. Likewise, the forced closure of all but essential retail activity resulted in a decrease of 28.8% in clothing and footwear and an 8.5% drop in expenditure on furnishings and household appliances during the first half of 2020. 

On the other hand, expenditure on utilities increased by 5.2% reflecting the reality of households spending more time indoors.

Government expenditure increased by more than 12% during this period, explained by the increase in health-related expenses and the first tranche of COVID-19 industry supportive measures.

Tourist numbers 

In the midst of worldwide travel bans and closure of both airports and seaports between April and June, coupled with the confusion that still reigns in the travel industry, tourist expenditure plummeted.

As a key pillar of the Maltese economy, receiving more than 2.8 million tourists in 2019 which directly contributed €2.2 billion towards the local economy, the tourism and hospitality industry have seen unparalleled drops from the very early days of this pandemic.

By the end of August, the number of tourist arrivals for the year fell by 71% or by more than 1.3 million when compared to the same period last year. As a result, tourist expenditure for the first eight months of 2020 amounted to roughly €353 million which is more than €1.1 billion short of that recorded in 2019.

Labour market

On the back of strong and sustained economic growth, the labour market pre-COVID was upbeat. Employment growth in 2019 stood at 5.8%, reflecting strong labour market conditions, driven by improved business prospects and an influx of foreign workers. The unemployment rate reached a historically new low at 3.5% in 2019, which was 3 percentage points lower than the EU average.

However, as COVID-19 continues to stifle economic activity and ravage human lives, labour market expectations going into Q4 2020 are bleak for most sectors.

Despite signs of a buoyant labour market way into the first quarter of 2020, the unemployment rate in quarter 2 eventually increased to 4.5%. Notwithstanding, government COVID-19 measures, targeted specifically at protecting jobs, seem to have so far paid off. Expected losses in headcount employment for the first half of 2020 are rather mild, particularly in the distributive trade, transport, accommodation and food services, which were the
worse hit.

Average basic salaries and operating profits, however, have not been left unscathed, as they appear to have absorbed the rest of the impact not cushioned by the reach of government support, in exchange for job security. As a result, average salaries and operating profits in the first half of 2020 fell, respectively, by 8.7% and 9.5% when compared to the same six months last year. Almost every sector reported lower average salaries, but the worst hit were those that had to rely exclusively on the COVID wage supplement, such as the
accommodation sector, and those that had to cut down their operations to 4 or 3 day weeks, such as the manufacturing industry.

In line with the projected improvement in economic activity levels, the labour market is expected to rebound over the next two years.

Public finance

Public finances are expected to deteriorate in 2020 due to the expected decline in economic activity and the introduction of COVID-19 related support measures. The government balance in the first quarter of this year is already in deficit by 337 million and projected to go up to an equivalent 8.6% of GDP by the end of year.

The Central Bank of Malta expects this shortfall to narrow in 2021, and to stand at 3.5% of GDP by 2022. The government debt to GDP ratio is forecasted to rise from 43.1% in 2019 to 57.9% by 2022, remaining below the 60% threshold value of the Stability and Growth Pact.

Given the persistent uncertainty surrounding this pandemic, the Central Bank of Malta has also published a more severe scenario in which the current predicament drags for longer than expected. Under this scenario, GDP would fall by 9.3% this year, rebounding to 5.5% and 3.7% in 2021 and 2022, respectively. Government deficit would reach 11.3% in 2020 before narrowing to 5.4% over the next two years, while the debt to GDP ratio would rise to 66% by the end of 2022.

This analysis is part of a broader Budget 2021 assessment carried out by Seed Consultancy. See the full analysis in the PDF attached below. 

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.