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PwC Macroeconomic Outlook

February 2021

After a difficult year, the global economy is set to recover, but unequally and amidst great uncertainty…

The PwC network’s latest forecasts estimate that the global economy is set to expand by 5% in FY2021, masking different stories for different economies. 

On one hand, there is China, which is specialised in exporting consumer goods (as opposed to capital goods) and is already bigger than its pre-pandemic size. On the other hand, there are large and advanced service-based economies like the UK, France and Spain and capital goods-exporting economies such as Germany and Japan, which have been heavily impacted in 2020 and are not expected to return to pre-COVID-19 levels during 2021. 

This follows from a year in which almost all major economies suffered the worst recession in decades, with the Eurozone economy estimated to have contracted by an average of 7.6% in 2020, the UK by 11% and the US by 3.7%. Globally, the COVID-19 pandemic has had more than double the economic impact than that of the great financial crisis in 2008 (5% drop vs 2% drop).

Declining global output is likely to lead to an increase in unemployment, with the OECD forecasting an unemployment rate of around 7% for its members, up from 5.5%. 

It is feared that the majority of job losses will be suffered in the lower-earning segment of the economy, thereby exacerbating income inequality across the developed world. Expect governments’ focus in the medium-term to shift from dealing with containing the immediate fall-out from the pandemic to dealing with higher unemployment rates by upskilling the labour force, retraining and trying to create jobs in newly emerging labour-intensive sectors (think the Green Economy).

The Green Economy is set to finally kick-off in 2021…

The year 2021 could arguably be the first year in which the world’s three largest economies (US, EU and China) will all refocus their efforts to fighting climate change. President Biden has already written to the UN to formally begin the process of re-joining the Paris Accord, and is expected to host an international climate summit early this year. If nothing else, there has definitely been a change in tone from the White House. 

Meanwhile, EU member states are expected to finalise their plans to accelerate the transition towards a greener (and more digital) economy by the end of April. The EU Commission is then expected to release the first tranche of grants and loans worth around 0.5% of Eurozone GDP (or 5% over five years) to speed up the process. 

Finally, China’s 14th Five Year Plan is expected to be put to action, part of which includes increasing energy efficiency. This and other issues are also expected to be discussed at the United Nations Climate Change Conference (COP26) in Glasgow later this year.

Another reason why we believe that 2021 has much to offer in terms of the Green Economy are the projections set by the Climate Bond Initiative, which suggest that global green bond issuance is expected to top $500bn for the first time, up from c.$350 in 2020 and c.$250 in 2019. 

Public debt will continue to rise, but not necessarily at an unsustainable rate…

The IMF is expecting G7 public debt to increase by around $4 trillion in 2021, as governments continue to mobilise fiscal resources to save jobs and prop-up aggregate demand.  In a situation where the world’s richest countries are holding debt-to-GDP ratios of 140% on average, this will undoubtedly be kept back of mind when making decisions as to how best to allocate public funds as economies seek to rebuild. 

Is this cause for concern? 

It would be if real GDP growth is not able to outpace the increase in the real level of interest cost incurred on such public debt. The extraordinary accommodative monetary policy environment created by central banks around the world, coupled with the anticipated rebound in economic activity, implies that this may (hopefully) not be the case. However, any delay in the economic recovery would of course put increased strain on the sustainability of public finances.

Interest Rates

Interest rates could be set to remain lower for longer…

Monetary policy is expected to remain accommodative in the largest economies in 2021, reflecting a shift in mentality and strategy in major central banks. For example, in August 2020, the Fed completed a review of its mandate, moving towards an average inflation targeting regime, which is more focused on employment (rather than the ‘natural rate’, which is more theoretical).  

Likewise, the ECB is undergoing a strategic review of its own monetary policy strategy (results expected in the fourth quarter of this year), and there are some signals that the ECB could follow a similar path set by US policymakers. 

Malta’s economy is arguably more exposed than its European peers to the economic shocks caused by the pandemic…

Malta’s economy appears to have been more severely hit than its EU peers, mostly because of its exposure to the tourism industry. In fact, tourist arrivals amounted to under 0.7m in 2020, less than 25% of the 2019 level. When removing the pre-pandemic months of January and February, this falls further to about 15%. 

Considering the economic data available after the pandemic hit, Malta’s GDP has contracted by an average of 13% in Q2 and Q3, compared with an average of 9.5% in the Eurozone. 

Albeit small and open, Malta’s economy has proven resilient to economic shocks in the past, most notably during the recession in 2009, when the local economy contracted by just 1.1%, compared with an average contraction of 3.75% in the Euro Area. 

However, this time, the recession is different, as the bulk of the economic shock is the direct result of an overnight quasi-halt to tourism and related activities across the globe. It is therefore no surprise that Malta’s economy is all the more susceptible.  

On the other hand, despite the contraction in GDP, unemployment has remained contained at 4.7% (up only marginally from pre-COVID levels of 3.5%), compared to 8.3% in the Eurozone.

Confidence indicators suggest that business and consumer sentiment remains low from a historical perspective, but is slowly recovering from the negative shocks experience when the pandemic started.

Valletta skyline

However, various institutions are expecting a strong recovery in 2021, contingent on key assumptions…

The Central Bank of Malta’s (CBM) outlook for 2021 is that GDP should increase by 5.0% in 2021 and a further 5.5% in 2022, driven mainly by pick-ups in domestic demand (i.e. private consumption and investment). At this rate, Malta’s economy is set to reach (and slightly exceed) its pre-pandemic level by the end of 2022. 

It is encouraging to see other institutions also reflect this relatively upbeat sentiment for the short to medium term, with the IMF and EU Commission projecting growth rates of 4.8% and 3.0% in 2021 and 5.5% and 6.2% in 2022, respectively. 

The CBM also presents its adverse scenario, with the assumption that containment measures would be in place for the next two years, dampening the tourism recovery. In this scenario, GDP is expected to return to its 2019 level only in 2023.

The Maltese economy also enjoys a relatively healthy fiscal position, with its debt-to-GDP ratio standing at 53.7% in Q3 of 2020, compared with an average of 97.3% in the eurozone. In fact, despite a significant decline in economic activity, Malta’s debt-to-GDP ratio is expected to remain under control over the medium term, rising to 60.3% by 2023. This could prove fundamental in Malta’s recovery over the medium term, since it implies that Government has significant fiscal maneuverability relative to other countries.

After a difficult year, 2021 is showing signs of a gradual recovery, but this recovery cannot be taken for granted. The ability to return to pre-pandemic levels depends largely on the control of the spread of the virus and the achievement of herd immunity, to a level which health authorities deem safe for restrictions to be lowered. We must remember that this is a different recession to those before it – our health comes first. 

Contact us

David Valenzia

David Valenzia

Territory Senior Partner, PwC Malta

Tel: +356 2564 6892

Ian Abela

Ian Abela

Manager, Advisory, PwC Malta

Tel: +356 2564 2354

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