Meanwhile, both the ECB and the European Commission introduced new pandemic instruments, which benefitted the domestic economy, though the benefits of some of these, like the Next Generation EU funds, will accrue during 2021. Given this context, the Bank expects economic activity to contract sharply this year, with a gradual recovery starting next year, though this outlook is conditional upon a containment of the spread of the virus and the rollout of a vaccine during 2021. Compared with our August projections, we are revising GDP growth downwards in 2020 and 2021 due to the deterioration of the international economic environment; the renewed containment measures introduced in October; and a more subdued recovery in tourism than previously anticipated. Exports are expected to be the largest contributor to the decline in GDP in 2020. Both domestic and external factors have been severely negative for exports during this year. In particular, foreign demand has declined dramatically while travel disruptions negatively affected services exports. In addition, supply disruptions during the first part of the year have adversely impacted the productive capacity of Maltese exporters. Exports should bounce back next year, but will likely remain constrained by uncertainties related to travel and Brexit. Furthermore, in 2021, foreign demand is expected to recover only partially from the decline experienced in 2020. As restrictions were lifted in May and June, private consumption is expected to have recovered somewhat, partly assisted by the Government’s voucher scheme, though uncertainties about the length of the pandemic are likely to have kept household saving higher than usual.

Other services were deeply impacted by the shutdown of non-essential services, and other sectors – such as manufacturing – were adversely affected by disruptions to the global supply chain. Although GDP still posted positive growth in the first quarter, the contraction in the second was broadly at par with that registered in the euro area. Incoming data suggest that economic activity began to recover and sentiment improved in the third quarter as the most disruptive containment measures were lifted, Page | 1 Document Classification: Public  but rising positive cases and newly introduced restrictions will likely weigh on activity in the fourth quarter, so that confidence among consumers and business is likely to take longer to recover than previously anticipated. During these uncertain times, projections have become increasingly difficult, as economic activity is intrinsically linked to the evolution of the pandemic, its impact on confidence of consumers and businesses, and very importantly to policy support and prospects of a medical solution. Unlike the great financial crisis of 2008-2009, the fiscal response has been prompt and significant, aided by the fiscal space accumulated in recent years. Liquidity measures such as tax deferrals, moratoria on loan repayments and the Malta Development Bank COVID-19 Guarantee Scheme, have all been fundamental in limiting bankruptcies by providing liquidity support. In addition, the Wage Supplement Scheme has been very successful in avoiding higher unemployment. Additionally, the voucher scheme has been a welcome boost to support domestic consumption, and provided some relief to the retail and hospitality sector during summer.