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Central Bank of Malta Quarterly Review – Second Issue 2013

The Central Bank of Malta has published the second issue of its Quarterly Review for 2013, which analyses economic and financial developments in Malta and abroad during the first quarter of 2013 and comments on general developments in subsequent months.

Referring to the monetary policy stance of the Eurosystem, the Review notes that the Governing Council of the European Central Bank (ECB) left key interest rates unchanged in the first quarter of 2013. In May, however, the rate on the main refinancing operations 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%. The rate on the deposit facility was left unchanged at zero. As a result, the corridor between the ECB’s key policy rates narrowed to 100 basis points from 150 basis points. This decision reflected expectations of low underlying price pressures over the medium term, ongoing weakness in the euro area economy and subdued money and credit dynamics. In July, the Governing Council adopted a forward guidance approach to monetary policy, announcing that it expected key ECB interest rates to remain at current or lower levels for an extended period.

The Eurosystem also continued to implement non-standard monetary measures aimed at supporting the monetary policy transmission mechanism.

The Review notes that growth in the major advanced economies outside the euro area was generally weak during the first quarter of 2013. Economic expansion in emerging nations also slowed down. Inflationary pressures during the period remained moderate in most large economies, while commodity prices generally dropped.

In the euro area, during the first quarter of 2013, economic activity remained weak, with the annual rate of growth dropping to -1.1% from -0.9% in the previous quarter. This contraction was entirely driven by domestic demand, as net exports increased. Output also fell in relation to the previous quarter. However, the quarter-on-quarter growth rate turned positive in the second quarter, standing at 0.3%. The annual inflation rate based on the Harmonised Index of Consumer Prices (HICP) eased further, reaching 1.6% in June.

According to the Eurosystem staff projections, published in June, gross domestic product (GDP) in the euro area is expected to decline by 0.6% in 2013, before expanding by 1.1% in 2014. The euro area average annual rate of inflation is projected to ease significantly, from 2.5% in 2012 to 1.4% in 2013 and 1.3% in 2014.

In Malta, the annual real GDP growth rate stood at 1.6% in the first quarter of 2013, compared with 1.7% in the preceding quarter. Growth was driven by changes in inventories, as net exports, private and government consumption and gross fixed capital formation declined on the previous year.

The Review carries a Supplement on developments in GDP in the second quarter of the year, based on data which became available after the Review had been prepared. These data show that the economy expanded at an annual rate of 1.7% in the second quarter, after having grown by a revised 1.8% in the first quarter.

Price pressures in Malta eased during the review period. Annual HICP inflation declined to 1.4% in March from 2.8% in December. This primarily reflected weaker price increases of services and of non-energy industrial goods. Meanwhile, price pressures from energy and food also abated. The annual HICP inflation rate moderated further in the second quarter of 2013, decelerating to 0.6% in June.

Employment continued to rise during the first quarter of 2013, though at a slower pace compared with the previous quarter. The Labour Force Survey shows an annual increase in employment of 1.7%, following a rise of 3.3% in the preceding quarter. The unemployment rate remained unchanged at 6.1% compared with a year earlier.

First quarter indicators regarding competitiveness continued to show mixed results. Both the nominal and real harmonised competiveness indicators increased further, as a result of the appreciation of the euro. Growth in unit labour costs, measured as a four-quarter moving average, eased to 3.1% in the March quarter from 3.5% in the last quarter of 2012.

During the quarter under review, the deficit on the current account of the balance of payments widened compared with the same period a year earlier. This was a result of higher net outflows on merchandise trade and lower net inflows on the services account. However, expressed as a four-quarter moving sum, the balance on the current account remained positive, standing at 0.7% of GDP in the year to March 2013, as against a surplus of 1.2% a year earlier.

The contribution of monetary financial institutions resident in Malta to the euro area broad money stock gathered momentum, with the annual growth rate increasing from 8.7% in December to 9.0% in March. Deposits held by Maltese residents, as well as credit granted to them, grew at a faster annual rate than in the previous quarter, though lending to the private sector subsequently decelerated.

Turning to domestic financial markets, yields on three-month Treasury bills fell in both the primary and secondary market. Yields on five-year and ten-year government bonds also declined. The downward trend in yields persisted for most of the second quarter. Meanwhile, in the first half of 2013, the Malta Stock Exchange share index rose further.

On the fiscal front, the Review observes that in the first three months of the year the general government deficit widened on a year-on-year basis, as expenditure outpaced revenue. Measured over a 12-month period, the deficit stood at 3.6% of GDP at the end of March, compared with 3.3% in 2012. The general government debt also rose, from 71.6% in December to 75.4% in March. During the first seven months of the year, the balance on the Consolidated Fund improved, however, with the shortfall narrowing by €74.3 million over the same period of 2012.

Regarding financial stability, core domestic banks in Malta remain resilient, registering strong earnings and showing healthy liquidity and capital levels. They are, however, encouraged to further augment their provisions in the light of vulnerabilities stemming from certain sectors of the economy. Moreover, core domestic banks are urged to strengthen their capital buffers ahead of the deadline to meet international regulatory requirements.

From an economic policy perspective, the Review stresses the importance of implementing measures that would bring the general government deficit below the 3% threshold in 2013. Thereafter, progress should be made towards the medium-term objective of a balanced budget and to reduce the public debt ratio sustainably.

To safeguard Malta’s external competitiveness the Review highlights the importance of implementing the reforms outlined in the latest National Reform Programme. Moderate wage increases, improvements in productivity, as well as flexible work arrangements and incentives that would encourage labour market participation are key in this regard. The planned diversification of energy sources should also be pursued.

The Review carries a box on the Household Finance and Consumption Survey in Malta and another on the EU Treaty on Stability, Coordination and Governance. Two other boxes focus on inflation persistence in Malta and price competitiveness in the tourism sector, respectively.

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