After a difficult year, the global economy is set to recover, but unequally and amid great uncertainty.
The PwC network’s latest forecasts estimate that the global economy is set to expand by five per cent in FY2021, masking different stories for different economies.
On one hand, there is China, which is specialised in exporting consumer goods (as opposed to capital goods) and is already bigger than its pre-pandemic size. On the other hand, there are large and advanced service-based economies like the UK, France and Spain and capital goods-exporting economies such as Germany and Japan, which have been heavily impacted in 2020 and are not expected to return to pre-COVID-19 levels during 2021.
2021 could arguably be the first year in which the world’s three largest economies will all refocus their efforts to fighting climate change.
The US has officially rejoined the Paris accord and is expected to host an international climate summit early this year. Meanwhile, the EU Commission is expected to release the first tranche of grants and loans worth around 0.5 per cent of eurozone GDP to speed up the process, while China’s 14th Five Year Plan is expected to be put to action, part of which includes increasing energy efficiency.
Furthermore, data from the Climate Bond Initiative suggest that global green bond issuance is expected to top $500 billion for the first time, up from c. $350 in 2020 and c. $250 in 2019.
The IMF is expecting G7 public debt to increase by around $4 trillion in 2021, as governments continue to mobilise fiscal resources to save jobs and prop-up aggregate demand, with the world’s richest countries expected to hold debt-to-GDP ratios of 140 per cent on average.
Is this cause for concern?
It would be if real GDP growth is not able to outpace the increase in the real level of interest cost incurred on such public debt. The extraordinary accommodative monetary policy environment created by central banks around the world, coupled with the anticipated rebound in economic activity, implies that this may (hopefully) not be the case. However, any delay in the economic recovery would, of course, put increased strain on the sustainability of public finances.
Monetary policy is expected to remain accommodative in the largest economies in 2021, reflecting a shift in mentality and strategy in major central banks (for example, the Fed moving towards an average inflation targeting regime, which is more focused on employment).
This is a different recession to those before it – our health comes first
Malta’s economy appears to have been more severely hit than its EU peers, mostly because of its exposure to the tourism industry. In fact, tourist arrivals amounted to under 0.7 million in 2020, less than 25 per cent of the 2019 level. When removing the pre-pandemic months of January and February, this falls further to about 15 per cent.
Considering the economic data available after the pandemic hit, Malta’s GDP has contracted by an average of 13 per cent in Q2 and Q3, compared with an average of 9.5 per cent in the eurozone.
Albeit small and open, Malta’s economy has proven resilient to economic shocks in the past, most notably during the recession in 2009, when the local economy contracted by just 1.1 per cent, compared with an average contraction of 3.75 per cent in the euro area. However, this time, the recession is different, as the bulk of the economic shock is the direct result of an overnight quasi-halt to tourism and related activities across the globe.
On the other hand, despite the contraction in GDP, unemployment has remained contained at 4.7 per cent (up only marginally from pre-COVID levels of 3.5 per cent), compared to 8.3 per cent in the eurozone.
Confidence indicators suggest that business and consumer sentiment remains low from a historical perspective, but is slowly recovering from the negative shocks experienced when the pandemic started.
The Central Bank of Malta’s (CBM) outlook for 2021 is that GDP should increase by five per cent in 2021 and a further 5.5 per cent in 2022, driven mainly by pick-ups in domestic demand. At this rate, Malta’s economy is set to reach (and slightly exceed) its pre-pandemic level by end 2022.
It is encouraging to see other institutions also reflect this relatively upbeat sentiment for the short to medium term, with the IMF and EU Commission projecting growth rates of 4.8 and 3.0 per cent in 2021 and 5.5 and 6.2 per cent in 2022, respectively.
The CBM also presents its adverse scenario, with the assumption that containment measures would be in place for the next two years, dampening the tourism recovery. In this scenario, GDP is expected to return to its 2019 level only in 2023.
The Maltese economy also enjoys a relatively healthy fiscal position, with its debt-to-GDP ratio standing at 53.7 per cent in Q3 of 2020, compared with an average of 97.3 per cent in the eurozone. In fact, despite a significant decline in economic activity, Malta’s debt-to-GDP ratio is expected to remain under control over the medium term, rising to 60.3 per cent by 2023.
After a difficult year, 2021 is showing signs of a gradual recovery, but this recovery cannot be taken for granted. We must remember that this is a different recession to those before it – our health comes first.