CBM expects economy to recover by 2021 but projections hinge on duration of pandemic and size of response

The Maltese economy will recover and start growing again next year. In a report, the Central Bank of Malta emphasised that which international credit agencies and the International Monetary Fund have said with regard to our country, namely that it is currently in a state where it can fiscally adopt to the current needs.

The Central Bank said that the fiscal space created in the last few years, together with the Central European Bank’s monetary stimulus, will help to reduce Covid-19’s negative impact on the Maltese economy. According to this report, the financial and fiscal measures announced by the government to assist the private sector will also help to mitigate the negative impact of the pandemic. The Central Bank will continue evaluating the situation and contribute to the necessary actions that need to be taken.

However, the CBM admitted that projections of economic activity, both for Malta and globally, critically hinge on the duration of the pandemic, as well as the size of the local and global fiscal response.

Prior to the pandemic reaching Malta, the Central Bank of Malta expected economic growth over the coming years to moderate but remain strong. Growth was primarily expected to be supported by all components of domestic demand. Compared with the Bank’s previous projections, published in December 2019, gross domestic product (GDP) growth was revised downwards in 2020. Similarly, the pace of job creation was expected to ease but remain strong from a historical perspective. Meanwhile, annual inflation, based on the Harmonised Index of Consumer Prices (HICP), was projected to pick up, reflecting faster increases in services prices and non-energy industrial goods.

The COVID-19 global health crisis, however, has meanwhile prompted a powerful and ongoing economic shock. In this regard, the Central Bank of Malta has made some preliminary estimates of the impact of the containment measures imposed by the Maltese government until 15 March 2020. At that juncture, the Bank estimated that containment measures imposed until that date would lower GDP growth by around 3.5 percentage points, when compared with the baseline projections. In addition, as a result of lower GDP growth, the fiscal balance would be adversely affected by around 0.8 percentage points.

The fluidity of this situation and its unknown duration mean that these estimates are characterised by a high degree of uncertainty. Thus, the Bank is continuously updating its outlook as new information becomes available.

More details on the Bank’s latest projections can be found here.