18/06/2013

Central Bank of Malta Quarterly Review – First Issue 2013

The Central Bank of Malta has just published the first issue of its Quarterly Review for 2013, which analyses economic and financial developments in Malta and abroad during the final quarter of 2012, while highlighting some further developments in subsequent months. 

The Review carries an article on the Bank’s econometric model of the Maltese economy. It also features a number of boxes, including one on labour market developments in Malta and another on the economic impact of structural reforms. 

The Review reports on recent monetary policy decisions in the euro area and observes that the European Central Bank (ECB) left key interest rates unchanged during the last quarter of 2012 and the first four months of the following year.  In May 2013, the interest rate on the main refinancing operations (MRO) was lowered by 25 basis points to 0.50%, while that on the marginal lending facility was reduced by 50 basis points to 1.00%. These cuts were prompted by expectations of low underlying price pressures amid a continuing recessionary environment, weak economic sentiment and subdued growth in money and credit in the euro area.

As the monetary policy transmission remained impaired, the Eurosystem continued to implement non-standard monetary policy measures throughout the period reviewed. 

The Review notes that economic activity in the major industrial countries slowed down during the December quarter. Annual gross domestic product (GDP) growth in the United States, though positive, decelerated significantly when compared with previous quarters. At the same time, Japan and the United Kingdom continued to record near-zero growth. On the other hand, in the emerging economies of Asia, activity recovered from its earlier slowdown, with annual growth accelerating in China and India.  

In the euro area, real GDP contracted by 0.9% on a year earlier. The decline was completely driven by domestic demand, which offset the positive contribution of net exports. Meanwhile, the annual inflation rate based on the Harmonised Index of Consumer Prices (HICP) eased from 2.6% in September to 2.2% in December, reflecting mainly developments in energy prices. The inflation rate continued to moderate during the first four months of the current year, going down to 1.2% in April.

According to the March 2013 ECB staff projections, annual real GDP growth in the euro area is expected to range between -0.9% and -0.1% in 2013 and between 0.0% and 2.0% in 2014. The euro area average inflation rate is projected to range between 1.2% and 2.0% in 2013 and between 0.6% and 2.0% in 2014.

Turning to the Maltese economy, the Review notes that the Maltese economy continued to expand in the last quarter of 2012, but at a slower pace than in the previous quarter. Net exports provided the stimulus to growth as domestic demand declined due to lower investment and inventories.

The Review also carries an insert on developments in GDP in the first quarter of 2013, data on which became available after the Review had been prepared. These new statistics show that the economy expanded by 1.6% in the first three months of 2013, following a rise of 1.7% in the previous quarter. 

Turning back to the economic survey carried in the Review, the annual rate of HICP inflation moderated further during the final quarter of 2012, easing to 2.8% in December from 2.9% three months earlier. This deceleration was due to developments in services and energy prices. The annual HICP inflation rate moderated further during the first quarter of 2013, decelerating to 1.4% in March.

Employment continued to increase during the final quarter of 2012, with the Labour Force Survey showing an annual increase of 3.4%. The survey also shows that the unemployment rate declined to 6.5% from 6.6% a year earlier.

Fourth quarter competitiveness indicators were mixed.  Both the nominal and the real harmonised competitiveness indicator increased between September and December, as a result of the appreciation of the euro against other major currencies.  On the other hand, growth in unit labour costs moderated.

In the external sector, the current account of the balance of payments showed a smaller surplus on the same period of 2011. This was mainly a result of higher outflows on the income account and a larger deficit on merchandise trade. The current account balance, expressed as a four-quarter moving sum, stood at 0.4% of GDP compared with 0.5% in the preceding quarter.

The contribution of Maltese monetary financial institutions to the euro area broad money stock accelerated further, with the annual growth rate rising from 6.3% in September to 8.7% in December. Deposits held by Maltese residents grew at a faster pace compared with the previous quarter, whereas credit granted to the private sector slowed down. 

Turning to domestic financial markets, the Review observes that the yields on Treasury bills fell in both the primary and the secondary market. Yields on ten-year Maltese government securities also decreased. Further declines in yields were registered in the first quarter of 2013. In the final quarter of 2012 and the first three months of 2013, the Malta Stock Exchange share index continued to increase, extending the upward trend that started during the second quarter of 2012. 

In its analysis of the fiscal situation, the Review notes that the general government deficit rose to 3.3% of GDP in 2012, compared with 2.8% in 2011, as expenditure outpaced revenue. The general government debt increased from 70.3% of GDP in 2011 to 72.1% in 2012.

The Review also presents the Bank’s latest economic projections, which were completed in May 2013.  Real GDP growth is expected to accelerate from 0.8% in 2012 to 1.4% in 2013 and further to 1.9% in 2014.  Economic growth is expected to be driven by domestic demand, particularly private consumption. The average HICP inflation rate is projected to moderate to 1.4% in 2013 and remain at this level in 2014. Risks to both the growth projections and inflation outlook are seen to be broadly balanced.

From a policy perspective, the Bank stresses the importance of implementing measures that would bring the general government deficit back down to below the 3% threshold this year. Fiscal consolidation should continue thereafter to achieve the medium-term objective of a balanced budget and a sustained reduction in the debt ratio, while the domestic fiscal framework needs to be strengthened. The Bank also notes that to sustain economic growth, Malta needs to safeguard its external competitiveness through moderation in wage increases and improvements in productivity. 

Regarding financial stability, banks in Malta remain profitable, liquid and well capitalised, with the core domestic banks being characterised by a strong deposit base and low reliance on wholesale funding sources. With respect to credit risk, these banks are exposed to certain sectors which continued to underperform. In view of this and in line with the upcoming new regulatory requirements, it would be appropriate for the banks to continue to increase their provisions and to further strengthen their capital buffers.

The first issue of the Quarterly Review for 2013 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.

Back to Archive