The Central Bank has made a downward revision of its economic projection for Malta this year in view of the persisting COVID-19 situation.

It said that after an estimated contraction of 8.2% last year, Malta’s gross domestic product (GDP), will grow by 5.0% this year, by 5.5% in 2022, and by 4.7% in 2023. That is in line with an assessment by credit rating agency Moody's which last week projected growth this year of 5.1 per cent.

The Central Bank said GDP growth was being revised downwards (from 5.9% projected in December) for 2021 due to the impact of stringent containment measures, that spilled further into 2021.

"However, GDP growth is being revised upwards for 2022 and 2023.

"The Bank thus maintains its expectation that 2019 GDP levels are to be recouped towards the end of 2022, conditional on the successful rollout of a vaccine in 2021.

The bank explained that declining net exports were the main contributor to the contraction in GDP in 2020, reflecting a sharp drop in foreign demand, restrictions on travel-related activities, and disruptions to the global supply chain. However, domestic demand was also estimated to have contributed negatively, as the various containment measures curtailed various activities during the year, especially during the second quarter, and elevated levels of uncertainty which adversely impacted private consumption and investment.

Contractions in these two expenditure components were only partially mitigated by increased government consumption. Domestic demand is expected to be the main driver of the projected recovery in subsequent years.

It said that despite the sharp contraction in 2020, the labour market showed remarkable resilience. Unemployment initially rose during the first wave of COVID-19, but then declined, as fiscal measures were supportive of employment.  

Annual inflation based on the Harmonised Index of Consumer Prices is set to edge up to 0.9% in 2021, from 0.8% in 2020, reflecting faster growth in services prices. Furthermore, non-energy industrial goods (NEIG) inflation is set to turn positive. Overall HICP inflation is set to edge up to 1.7% by 2023, reflecting a pickup in economic activity, which is expected to lift prices of services, the bank said. 

Public finances deteriorated sharply in 2020 due to the decline in economic activity and the introduction of COVID-19 related fiscal support. The Bank is now projecting that the general government will record a deficit of 9.5% of GDP in 2020.  As economic activity improves and the need for COVID-related support gradually fades, the deficit is set to narrow further to 3.9% of GDP by 2023. Consequently, the government debt-to-GDP ratio is projected to rise from 42.4% in 2019 to 60.3% by 2023.

Given the prevailing uncertainty, the Bank has also published a more severe scenario in which it considers the effects of some restrictive health protocols being maintained beyond 2021, in the event that the pace of vaccination is slower than currently projected and new infectious strains become harder to control. In such a scenario, the 2019 level of GDP would be reached only in 2023. Additionally, the government deficit would deteriorate more sharply in 2021, reaching 10.0% of GDP, before narrowing to 5.6% in 2022 and 2023, while the government debt-to-GDP ratio would rise to 68.2% by then.

This publication also includes two boxes. The first analyses the impact of lower tourism flows on private consumption expenditure, while the second delves into a more detailed account of labour market developments since the onset of COVID-19 in Malta. 

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