Increase in unemployment inevitable even in best of circumstances – CBM on Covid-19 impact

The Central Bank of Malta expects economic growth to be severely affected by the outbreak of COVID-19 and the containment measures imposed by governments worldwide to stem the spread of the virus.

In its outlook for the next three years (2020-2022), the Bank argues that if 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.

This decline, as expected, will reflect mostly a drop in exports and travel-related disruptions. However, 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. Conversely, given the fluctuating international situation, domestic demand is expected to be the main driver of the projected recovery in 2021 and 2022.

This will lead to an inevitable drop in employment and a rise in those seeking a job. Government’s 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.

In 2020, lower domestic and international price pressures should also lead toward an easing in annual inflation, based on the Harmonised Index of Consumer Prices (HICP). However, in the short-run, inflation is expected to be impacted by cost-push factors, in the context of disruptions to the global supply chain. It is then set to edge up to 1.5% by 2022, reflecting a pick-up in economic activity, affecting prices of services and non-energy industrial goods inflation (NEIG).

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 moderate scenario, the government balance is projected to be in deficit of 6.8% of GDP in 2020. As most COVID-19 related measures are set to end this year, the deficit is expected to narrow in 2021, and to stand at 2.9% of GDP by 2022. The government debt-to-GDP ratio is projected to rise from 43.7% in 2019 to reach 55.0% by 2022.

However, the reality could be significantly wore if a second wave of infections would require the enhancement of health protocols. In this case, the GDP contractions and subsequent unemployment rates would be significantly higher.