Winter 2021 Economic Forecast

The Winter 2021 Economic Forecast published today, focuses on GDP and inflation developments in all EU Member States, struggling in different ways against the coronavirus pandemic. The economic impact of the pandemic remains uneven across Member States and the speed of the recovery is also projected to vary significantly.

The resurgence in the number of cases, together with the appearance of new, more contagious strains of the coronavirus, have forced many Member States to reintroduce or tighten containment measures. At the same time, the start of vaccination programmes throughout the EU provides grounds for cautious optimism.

The Forecast projects that the euro area economy will grow by 3.8% in both 2021 and 2022, while the EU economy will grow by 3.7% in 2021 and 3.9% in 2022.

Economic growth expected as containment measures ease
The euro area and EU economies are expected to reach their pre-crisis levels of output earlier than anticipated in the Autumn 2020 Economic Forecast, largely because of the stronger than expected growth momentum projected in the second half of 2021 and in 2022.

After strong growth in the third quarter of 2020, economic activity contracted again in the fourth quarter as a second wave of the pandemic triggered renewed containment measures. With those measures still in place, the EU and euro area economies are expected to contract in the first quarter of 2021. Economic growth is set to resume in the spring and gather momentum in the summer as vaccination programmes progress and containment measures gradually ease. An improved outlook for the global economy is also set to support the recovery.

Inflation outlook to remain subdued
The forecast projects that inflation in the euro area is set to increase from 0.3% in 2020 to 1.4% in 2021, before moderating slightly to 1.3% in 2022. The inflation forecast for the euro area and the EU has increased slightly for 2021 compared to the autumn but is, overall, expected to remain subdued.

High uncertainty and significant risks remain
Risks surrounding the forecast are more balanced since the autumn, though they remain high. They are mainly related to the evolution of the pandemic and the success of vaccination campaigns.

Positive risks are linked to the possibility that the vaccination process leads to a faster-than-expected easing of containment measures and therefore an earlier and stronger recovery.

Also, the EU’s recovery instrument,  NextGenerationEU, of which the centrepiece is the Recovery and Resilience Facility (RRF), could fuel stronger growth than projected, since the envisaged funding has – for the most part – not yet been incorporated into this forecast.

In terms of negative risks, the pandemic could prove more persistent or severe in the near-term than assumed in this forecast, or there could be delays in the roll-out of vaccination programmes. This could delay the easing of containment measures, which would in turn affect the timing and strength of the expected recovery. There is also a risk that the crisis could leave deeper scars in the EU’s economic and social fabric, notably through widespread bankruptcies and job losses. This would also hurt the financial sector, increase long-term unemployment and worsen inequalities.

The Forecast for Malta
Due to limitations on air traffic, tourism and social activities, in 2020 the Maltese economy suffered a severe contraction. Malta registered an expected fall in real GDP of around 9%, which came after robust growth of 5.3% in 2019. Investment fell, mainly due to a surprise drop in construction, while private consumption was dampened by contractions in sectors such as retail and hospitality. The toll on the economy, however, has been partially mitigated by government stimulus measures.

The second wave of restrictions globally has placed additional strain on the highly open economy in the last quarter of 2020 and continues to weigh in the first quarter of 2021. The expected rollout of vaccinations in 2021 and a gradual easing of restrictions in the EU should set the tourism sector back on the path to recovery and re-invigorate domestic demand.

In 2021, real GDP growth is expected to reach 4.5%. Growth is set to be mainly driven by net exports and domestic consumption, as inbound tourism and global trade recover gradually. The EU-UK Free Trade Agreement reduced a part of the negative impact assumed by the WTO-rules based assumption in the Autumn Forecast. The potential growth impact from policy measures related to the Next Generation EU programme is not yet included in this forecast and, thus, constitutes an upside risk to the growth outlook.

In 2022, Malta’s economy is forecast to expand by 5.4% as net exports return as the main contributor to GDP growth while domestic demand makes a slower but steady contribution. By the end of 2022, the tourism sector is expected to recover close to pre-pandemic levels and international trade should be significantly restored.

The Harmonised Index of Consumer Prices (HICP) inflation averaged 0.8% in 2020, lower than the 1.5% in 2019, driven mainly by subdued energy prices and lower inflation in services, against the background of the contraction in demand. In 2021, inflation is expected to rise to 1.3% on the back of recovering domestic demand and a higher demand for tourism services. In line with a stronger economic recovery in 2022, inflation should pick up further to around 1.6%.

Full document: Winter 2021 Economic Forecast.

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