Muscat gives Cabinet COVID-19 forecast

Joseph Muscat is back. This time as an economic consultant brought back into the heart of the Labour government to map out a new way out of the COVID-19 pandemic.

In a nine-page report compiled by “the office of Dr Joseph Muscat”, the former prime minister gave Cabinet ministers a note on the possible evolution of the Maltese economy in 2020 and 2021.

In it, the former Labour leader, who resigned in the wake of the Caruana Galizia assassination investigation and its implication of his chief of staff Keith Schembri, gave a wide range of scenarios: as bad as a loss of 16.1% in gross value added in 2020, to as much as a bumper 10% growth in 2021.

In all scenarios – ranging from mild to severe – Muscat laid out the inevitable: tourism will be badly hit due to global travel bans, but retail will likely to be the first sector to rebound.

“These simulations anticipate a loss in gross value added of between 6.1% and 16.1% for 2020... the Maltese economy, as almost all economies globally, is expected to contract in 2020. Our estimates are between 2.1% and 12.5% depending on the scenarios. Nevertheless, this is generally a better performance than its economic peers,” Muscat said.

But he anticipates the Maltese economy to go back in positive territory in 2021, “from as little as 0.2% to a bumper 10%.”

In the ‘moderate’ scenario, a 2021 recovery would be well below pre-COVID levels of expected GDP. In both the ‘relapse’ and ‘severe’ simulations, there would be no recovery from the losses of 2020. “In fact, further losses would be made,” Muscat warns.

The ‘severe’ scenario projects a partial lockdown all throughout 2020 but returning again in 2021, with travel shut down until a vaccine is made available towards end-2021, and disruptions in global supply chain.

Muscat’s analysis suggests it will be retail trade that will bounce back rapidly in all scenarios but the ‘severe’.

“We anticipate that this sector will be able to recoup a large part of its losses in 2021, as it will quickly adapt to new health protocols that will be rolled out, and as international brands will seek not to outprice themselves from their global market share.

“Telecommunications and information technology are also projected to be very quick to recover and return to their pre-COVID-19 expected trajectory.”

But he spelt bad news for professional services such as legal, accounting, rental, leasing and consultancy, saying firms will cut down on this sort of spending after a downturn.

“Financial services are also likely to be hit by second-round effects on account of non-performing loans, higher default rates and insurance claims, and lack of investment, even though European Union wide initiatives will help contain these effects. Manufacturing of non-essentials, such as clothing and electronics, could also feel such a second wave, though here the lost activity should be quite limited in absolute terms.”

Muscat said that even under the most optimistic scenarios in 2021 and the pandemic defeated, the demand for travel will be lowered significantly.

“In this respect, one expects resources to be further focused on niche tourism, such as culture, entertainment and event-driven tourism, where demand is less elastic and where value-added is higher,” Muscat said of tourism prospects.

“At the same time, one can anticipate that the global trend towards accommodation-sharing, which had become a dominant part of the Maltese market, will slow down, diverting business to collective accommodation (hotels) with more openly verifiable health protocols.

“This will also likely make more property available in certain segments of the long-let rental market, thus dampening rent prices which were considered to have an inflationary effect over the past years.”

Muscat said that in all four simulations, there would be positive GDP growth in 2021. “In fact, even in the ‘relapse scenario’, there would be a very respectable growth of 3.3% in 2021, obviously from a lower baseline. However, this would still leave the Maltese economy relatively divergent from the trend path that it was on pre-COVID-19.”

This forecast includes the impact from the government’s economic stimulus package, which Muscat estimates should recoup between 0.5% and 0.75% of GDP lost in 2020.

Muscat said he used an input-output framework to quantify the effects of sector-specific shocks on other sectors and the overall economy, by internalising sectoral interlinkages through demand-side and supply-side models. A traditional aggregate demand macro-model was used to convert results obtained by the input-output and fiscal frameworks on the expenditure side of the economy.

 Scenarios

The four scenarios are based on different assumptions about the development of the five factors described earlier. The scenarios range from a best-case scenario where there is a very rapid bounce-back to previous conditions (the thinking at the start of the pandemic), to a worst-case scenario where the virulence of the pandemic takes much longer to be restrained, impinging heavily on 2021 prospects.

This best-case Mild scenario assumes that there will soon be the widespread availability of reliable anti-body testing that would reveal that a relatively large part of the population is immune to COVID-19. Moreover, tests confirm that the level of immunity is quite high and long-lasting, and a vaccine will start to be rolled-out to the public by end of this year.

This implies that already in 2020, a large part of the population will be able to return to work. The travel ban would most likely continue till the start of summer (twelve weeks), but as the pandemic eases, travel destinations will slowly start opening. Still, travel will remain restricted till the end of 2020, that is till the vaccine starts to be administered to the world population.

Under this optimistic scenario, the peak of the pandemic in Malta is projected to occur in the third week of April, with lockdowns starting to be partially lifted by the start of May. Domestic economic activity will start to slowly return to normal after around an economic lockdown of six weeks.

Supply-side disruptions stemming from imports will last till the worse affected economies start opening their manufacturing plants, which we anticipate being around ten weeks and affecting 15% of manufacturing industries. Following the worldwide roll-out of vaccines, economic activity and crucially the tourism industry is assumed to return to normal in 2021.

Moderate scenario

Here Muscat assumes that only a small proportion of the population will be immune to the infection and that the vaccine will only become available in mid-2021. Furthermore, the local peak in the transmission will occur in early May.

This means that the current full lockdown will be partially lifted only in mid-May after eight weeks in place. The travel ban is therefore assumed to persist till mid-summer, but with partial lockdowns still in place for restaurants and accommodation establishments (in the form of mandatory reduced capacity). This implies that the tourism industry will suffer throughout summer.

With a fraction of the population immune to the COVID-19 virus, the infection rate will increase again in autumn and winter (second wave of transmission). However, with the health system and the population already prepared after the first outbreak, the outbreak will be manageable with less stringent lockdowns (with retail outlets remaining open for instance).

2021 will economically see a weak first half with limited travel and partial lockdowns in the economy. Since the authorities are well-prepared there will be no supply-chain restrictions on manufacturing. The economy at large, but mainly tourism and manufacturing, will be affected by lower external demand as the world-wide recession extends in 2021.

Relapse

This Relapse scenario is based on the Moderate outlook but assumes that a further outbreak during next autumn and winter is not manageable and that lockdowns and travel bans enacted up to spring of 2021 will be similar to the ones in place at the moment.

Therefore, the end of 2020 and more importantly the first half of 2021 will be characterized by stringent lockdowns and travel bans, similar to the ones currently in place. Moreover, import restrictions will re-emerge.

The roll-out of the vaccine in the second part of 2021 will result in a removal of lockdowns and travel bans, but foreign and domestic demand will remain subdued after more than a year of repeated lockdowns.

Severe scenario

The main assumption of this worst-case Severe simulation is that immunity guaranteed by anti-bodies gained through infection is short-lived and unstable, implying that lockdowns will only be completely lifted after the vaccine is rolled-out to the public. Moreover, this scenario assumes that the public will only be immunized in the fourth quarter in 2021.

Mandatory quarantine will still be imposed on foreign travellers till Q3 2020. From Q4 2020 onwards, travel will be possible but severely restricted.

Lockdowns in restaurants and accommodation outlets will be partial but will last until the third quarter of 2021. Import restrictions will become less severe but will affect manufacturing throughout the rest of 2020 and the first three quarters of 2021.

External demand will severely hit foreign oriented industries with severe second-round effects on local demand.