On November 5th, 2020, the European Commission issued its Autumn 2020 Economic Forecast. The coronavirus pandemic represents a very large shock for the global and EU economies, with very severe economic and social consequences. Economic activity in Europe suffered a severe shock in the first half of the year and rebounded strongly in the third quarter as containment measures were gradually lifted. However, the resurgence of the pandemic in recent weeks is resulting in disruptions as national authorities introduce new public health measures to limit its spread. The epidemiological situation means that growth projections over the forecast horizon are subject to an extremely high degree of uncertainty and risks.

The economic impact of the pandemic has differed widely across the EU and the same is true of recovery prospects. This reflects the spread of the virus, the stringency of public health measures taken to contain it, the sectoral composition of national economies and the strength of national policy responses. Below are the main points of this forecast.

Malta’s forecast

The COVID-19 pandemic is having an acute impact on critical sectors of Malta’s economy including tourism and external trade, leading to a temporary and limited increase in the unemployment rate. A modest recovery is forecast in 2021, with a stronger recovery expected in2022. However, considerable uncertainty surrounds the evolution of the pandemic and the impact of the change to less beneficial trading relations between the UK and the EU. After a major crisis-induced plunge in 2020, the general government balance is set to gradually improve, while public debt is expected to peak at 60% of GDP in 2021.

Inflation expected to ease amid recession

The contraction in private consumption, especially in the tourism-reliant retail sector, declines in demand for housing services and lower international energy prices are set to moderate headline inflation from 1.5% in 2019 to 0.8% in 2020. As the economic recovery unfolds next year, inflation is expected to pick up with a rise in the prices of services, reaching 1.3% in 2021 and 1.6% in 2022.

A limited impact on the labour market

Prior to the outbreak of the pandemic, Malta’s labour market was tight, and the unemployment rate reached a historical low of 3.6% in 2019. National safety measures to contain the virus affected employment only to a limited extent, such that the unemployment rate is expected to reach 5.1% in 2020, decreasing to 4.1% in 2022, in line with an accelerating economic growth.

European Union forecast

An interrupted and incomplete recovery.

The forecast projects that the EU economy will contract by 7.4% in 2020 before recovering with growth of 4.1% in 2021 and 3% in 2022. Output in both the euro area and the EU is not expected to recover its pre-pandemic level in 2022.

Rise in unemployment contained compared to drop in economic activity.

The unemployment rate in the EU is forecast to rise from 6.7% in 2019 to 7.7% in 2020 and 8.6% in 2021, before declining to 8.0% in 2022.

The unprecedented scope of measures taken, particularly through short-time work schemes, have allowed the rise in the unemployment rate to remain muted compared to the drop-in economic activity. Unemployment is set to continue rising in 2021 as Member States phase out emergency support measures and new people enter the labour market but should improve in 2022 as the economy continues to recover.

Deficits and public debt set to rise.

The forecast projects the aggregate government deficit of the euro area to increase from 0.6% of GDP in 2019 to around 8.8% in 2020, before decreasing to 6.4% in 2021 and 4.7% in 2022. This reflects the expected phasing out of emergency support measures in the course of 2021 as the economic situation improves.

Mirroring the spike in deficits, the forecast projects the aggregate euro area debt-to-GDP ratio will increase from 85.9% of GDP in 2019 to 101.7% in 2020, 102.3% in 2021 and 102.6% in 2022.

Inflation remains subdued.

Core inflation, which includes all items except energy and unprocessed food, fell substantially over the summer due to lower demand for services, especially tourism-related services and industrial goods. Weak demand, labour market slack and a strong euro exchange rate will exert downward pressure on prices.

For the EU, inflation is forecast at 0.7% in 2020, 1.3% in 2021 and 1.5% in 2022.

To conclude, this forecast is particularly important for Malta following the 2021 Budget, which in our view is a  strong social budget which hinges on an uncertain growth figure.