EC updates its economic forecasts for this year

On Tuesday morning, the European Commission (EC) published its economic expectations for 2020 and 2021. The EC now expects the European economy to contract by 8.3% in 2020, followed by a recovery of 5.8% in 2021. This forecast is lower than that predicted in the Spring 2020 Economic Forecast, where the EC estimated a contraction of 7.4% for this year, with a rebound of 6.1% in 2021.

As announced by the EU, the easing of confinement measures is proceeding at a more gradual pace than expected in the Spring Forecast. Consequently, the EC now predicts that the impact on the economic activity in 2020 will be more significant than previously expected.

This is substantiated by the statement made by the executive vice-president for the EU, Valdis Dombrovskis, who said that, “The economic impact of the lockdown is more severe than we initially expected. We continue to navigate in stormy waters and face many risks, including another major wave of infections.”

Concerns are also rising following a number of regional outbreaks in the recent days, with the World Health Organization (WHO) warning of a “very significant” resurgence of the coronavirus taking place across the European continent. Officials in Spain’s north-western region of Galicia have re-imposed containment measures on an area of 70,000 people, with the government of Catalonia re-imposing controls on an area of 210,000 residents.

The EC expects recovery to gain traction in second half of 2020. However, both the drop in output in 2020 and the strength of recovery in 2021 are expected to differ between member states. In view of the high downsides risks that exist, it is important to highlight the assumptions that the EC is taking in arriving at its forecast.

The unprecedented scale and duration of this outbreak, combined with the possibility of future lockdown measures, remain essentially unknown. The forecast is based on the underlying assumption that lockdown measures will continue to ease and that there will not be another wave of infections. The current situation may be further hampered if the UK and EU fail to secure an agreement on their future trading relationship.

It is pertinent for investors to analyse the assumptions on which forecasts are based, as the majority of analysts worldwide are not taking into account a possible resurgence of the coronavirus (“2nd Wave”). Additionally, analysts worldwide seem to be basing research on the assumption that lockdown restrictions will continue to be lifted gradually. This trend can also be identified from the V-shape performance of most international indices, which reached or even exceeded pre-pandemic levels.

Malta’s outlook as predicted by the EU

The Commission now expects Malta’s economy to contract by 6.0% this year, where in May it predicted a contraction of 5.75%. The EC has increased its expectations for Malta’s recovery in 2021 to 6.25% from the previously expected rebound of 6%.

The EC also noted that Malta’s economy was beginning to slow down even before the COVID-19 pandemic and that the local economy will be severely impacted by the absence of tourists. Albeit, the Government’s financial aid packages should help cushion the economic downturn. Furthermore, recent economic indicators, in particular in the construction and manufacturing sectors suggest a modest recovery.

Locally a number of local debt issuers started to issue their annual financial analysis summary and the consensus for those worst hit by the pandemic, is that 2020 will prove to be a difficult year, however re-opening of the economy should start the recovery process.

Local investors should follow closely market developments and base investment decisions on factual information, rather than market speculation. The local market is significantly smaller in comparison to international markets, consequently investors should keep an eye out for liquidity spreads.