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Central Bank of Malta Quarterly Review – Fourth Issue 2012

The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2012, which analyses economic and financial developments in Malta and abroad during the third quarter of 2012. The Review includes a short article on the role of the Joint Financial Stability Board which was established by the Bank and the Malta Financial Services Authority. The Review also carries the address delivered by the Governor during the latest Annual Dinner of the Institute of Financial Services – Malta, as well as a brief description of the Bank’s approach to forecasting inflation.

Referring to the monetary policy stance of the Eurosystem, the Review notes that, after having lowered the interest rate on the main refinancing operations (MRO) by 25 basis points in July, the Governing Council of the European Central Bank (ECB) left the rate unchanged, at 0.75%, during the rest of 2012. The decision to leave rates unchanged reflected the expectation that inflation in the euro area would remain in line with the ECB’s objective of price stability over the medium term.

In the second half of 2012, the Eurosystem continued to implement non-standard monetary measures aimed mainly at ensuring that monetary policy decisions were transmitted effectively to the euro area economy. In September, the Governing Council decided on the modalities to be used to undertake outright monetary transactions in secondary markets for bonds issued by euro area countries, subject to strict conditions. 

The Review observes that economic developments in the main industrial countries outside the euro area were mixed in the third quarter of 2012. The pace of expansion was broadly maintained in the United States but activity slowed down markedly in Japan and, to a lesser extent, in the major emerging Asian economies.

In the euro area, during the third quarter of 2012 economic activity contracted by 0.6% on a year earlier, due to a fall in domestic demand. The annual inflation rate based on the Harmonised Index of Consumer Prices (HICP) accelerated from 2.4% in June to 2.6% in September, mainly as a result of higher energy prices. However, underlying price pressures remained contained. Meanwhile, labour market conditions continued to deteriorate, with the unemployment rate rising to 11.6% by September.

According to the Eurosystem staff projections published in December 2012, the annual growth rate of gross domestic product (GDP) in the euro area was expected to have ranged between -0.6% and -0.4% in 2012, and to be between -0.9% and 0.3% in 2013. Real GDP growth was then projected to recover to between 0.2% and 2.2% in 2014. The euro area average annual inflation rate was expected to ease from 2.5% in 2012, to between 1.1% and 2.1% in 2013 and between 0.6% and 2.2% in 2014.

In Malta, annual real GDP growth accelerated to 1.9% during the third quarter of 2012, from 1.3% in the previous quarter. Both net exports and domestic demand contributed to the expansion, with the latter reflecting increases in government consumption and, to a lesser extent, investment.

The annual rate of HICP inflation moderated over the quarter under review, easing to 2.9% in September from 4.4% in June. This deceleration was due to developments in services prices, notably a fall in hotel accommodation rates. In December it stood at 2.8%.

Employment continued to expand in annual terms during the third quarter of 2012. Nonetheless, as the labour supply increased more strongly, the unemployment rate rose to 6.6% from 6.2% in the same period of 2011.

Third quarter indicators regarding price competitiveness continued to be mixed. The nominal harmonised competitiveness indicator increased from its June level, whereas the real measure dropped. Growth in unit labour costs, measured as a four-quarter moving average, accelerated to 3.4% in September from 2.5% in June.

Meanwhile, the current account of the balance of payments remained in surplus. However, the surplus narrowed, compared with the corresponding period of 2011, due to developments in the income account and a larger merchandise trade deficit. In contrast, the balance on both services and current transfers improved. Hence, the current account surplus decreased to 0.2% of GDP in the four quarters to September from 2.1% in June.

The contribution of Maltese monetary financial institutions to the euro area broad money stock accelerated further in the quarter under review. However, deposits held by Maltese residents grew at a slower pace than in the previous quarter, as did credit granted to them, with their annual growth rates reaching 5.7% and 3.8%, respectively in September. 

Turning to domestic financial markets, the Review notes an increase in yields on three-month Treasury bills. On the other hand, yields on ten-year government bonds declined. Meanwhile, equity prices rose. During the following quarter, domestic money market rates and government bond yields fell, while equities continued to recover. 

In its analysis of the fiscal situation, the Review observes that the general government deficit rose on an annual basis in the third quarter, as expenditure exceeded revenue. Measured as a four-quarter moving average, the deficit stood at 3.1% of GDP at end September, compared with 2.7% at the end of June. The general government debt, however, declined, falling to 73.1% of GDP in September.

The Review also presents the Bank’s latest economic projections, which were completed in November 2012. According to these projections, real GDP growth is expected to have been 1.0% in 2012, but should increase slightly to 1.1% in 2013 as private consumption and investment recover. The average HICP inflation rate is expected to fall to 2.4% in 2013, as food prices rise at a slower pace and energy prices decline. Risks to both the growth projections and inflation outlook are seen to be broadly balanced.

From a policy perspective, the Bank emphasises that, on the fiscal front, expenditure restraint is necessary to maintain progress towards the achievement of a structural balanced budget, which would enable a faster reduction in the debt ratio. Both price stability and fiscal discipline are key elements supporting sustainable economic growth. 

The fourth issue of the Quarterly Review for 2012 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.