Malta’s economic growth is expected to be “severely affected” by the COVID-19 outbreak and the containment measures put in place by the government, the Central Bank said on Friday.
In an outlook paper on the economy, the Central Bank ran through two potential scenarios, one where containment measures were successful and another where Malta had to contend with a second wave of the outbreak.
In the baseline scenario, which accounts for a situation in which containment measures are at least partially successful, GDP is projected to contract by 4.8% in 2020, and grow by around 5.8% and 4.2% in the following two years.
Despite the projected recovery, the level of economic activity is expected to be around 6% lower than that expected prior to the outbreak of COVID-19.
Under the baseline scenario, the largest contributor to the decline in GDP in 2020 is net exports, reflecting an expected decline in foreign demand, restrictions to travel-related activities, and disruptions to the global supply chain.
Domestic demand is also expected to contribute negatively, as the shut-down of various activities and elevated uncertainty is expected to adversely impact private consumption and investment.
Going forward, domestic demand is expected to be the main driver of the projected recovery in 2021 and 2022, according to the Central Bank’s scenario.
In view of the foreseen contraction in economic growth, employment is set to decline in 2020, leading towards an increase in the unemployment rate.
Fiscal measures are, however, expected to be supportive of the labour market, and hence, the expected losses in headcount employment are rather mild when compared with the foreseen decline in GDP. The labour market is then expected to rebound in the following years, due to the projected improvement in economic activity levels.
Public finances are expected to deteriorate in 2020 due to the expected decline in economic activity and the introduction of COVID-19 related measures.
In the severe scenario, it is assumed that the health protocols would have to be enhanced and extended to contain a second wave of infections.
The Central Bank estimates that GDP could contract by 8.3% this year, and rebound by 6.8% and 3.8% in 2021 and 2022.
In this case, the level of GDP would be around 9% lower than the Central Bank’s March projections, and would only reach 2019 levels by the end of 2022.
Moreover, the unemployment rate would rise further, and inflation would be slightly weaker. In addition, the government deficit would reach 10.4% in 2020, while the government debt-to-GDP ratio would rise to 63% by the end of 2022.