What We Think
June 11, 2020
Chart of the Week (24) – Economic outlook
Malta’s economic regeneration package announced last Monday offers a broad and wide-ranging set of measures aimed at stimulating consumer expenditure, supporting local businesses and investing in long-term infrastructure projects. All this is being done as the economy emerges from an unprecedented lock-down and faced with an uncertain outlook.
Prior to the onset of COVID-19, the Maltese economy was projected to continue growing strongly for the next few years, albeit with some moderation following a period of strong expansion. The outbreak of COVID-19 and the subsequent containment measures imposed by governments worldwide to control the spread of the virus, have now changed the course of this outlook.
Provisional estimates released by the National Statistics Office last week indicate that GDP for the first quarter of 2020 increased by just over €12 million in real terms or 0.5% when compared to the corresponding period last year.
For the majority of economic sectors, growth during this quarter has been muted by lock-down measures that came into force in early March. Construction appears to be the only sector left unscathed by this predicament as it continued to register strong performance throughout the first three months of the year. On average, services grew by 2.2%, driven mainly by gaming and professional service activities, while manufacturing and industry increased by less than 2%. At -4.6% over quarter 1 last year, the agricultural sector continues to be overlooked despite its importance for the country’s food security.
As expected, household consumption expenditure fell by 1.8% in nominal terms. 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 13.4% in clothing and footwear and a 5% drop in expenditure on furnishings and household appliances. On the other hand, spend on food and non-alcoholic beverages and utilities increased significantly as households prepared to lock themselves down.
With travel bans and disruptions to the global supply chain, exports and imports of goods and services in the first quarter of 2020 contracted by 2.3% and 5% respectively. Government expenditure, on the other hand, increased by close to 12% during this quarter, explained by the increase in health related expenses and the first tranche of COVID-19 industry supportive measures.
In this context and in view of the high uncertainty surrounding the evolution of this health crisis, the Central Bank of Malta expects economic growth to be severely impacted between this year and 2022. GDP is projected to contract by 4.8% in 2020 and grow by around 5.8% and 4.2% in 2021 and 2022 respectively. Employment is set to decline in 2020 and the unemployment rate to increase to 5.5%. Fiscal measures are however expected to cushion the negative economic shocks and hence the employment projections are rather mild when compared to the GDP prognosis. Employment levels are expected to rebound in the following years as projected economic activity picks up again. As expected, public finances will take a hit in terms of both lower revenues resulting from sluggish economic activity and higher expenditure in support of COVID-19 related measures. According to these latest projections government balance is estimated to be in deficit of 6.8% of GDP in 2020 which narrows down to 2.9% by 2022. The government debt to GDP ratio is expected to rise from 43.7% in 2019 to reach 55% by 2022, which would nonetheless continue to fall in line with the European Stability and Pact threshold of 60%.