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Central Bank of Malta Quarterly Review - Fourth Issue 2013

The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2013, which analyses economic and financial developments in Malta and abroad during the third quarter of 2013 and comments on additional developments in subsequent months. The Review also carries an article on Malta's financial accounts statistics and three brief analytical reports, shown as boxed items, on the Government's fiscal outlook for 2014, the demand for currency in Malta and the supply side of the Maltese economy.

The Review notes that the Governing Council of the European Central Bank (ECB) lowered key interest rates again during the fourth quarter of 2013. In November, the rate on the main refinancing operations was lowered by 25 basis points to 0.25%, while that on the marginal lending facility was also reduced by 25 basis points to 0.75%. The rate on the deposit facility was left unchanged at zero. This decision reflected indications of a further reduction in price pressures in the euro area over the medium term and of subdued monetary and credit dynamics.

In December 2013 and January 2014, the Governing Council left key interest rates unchanged and reiterated its forward guidance that it expected key ECB interest rates to remain at current or lower levels for an extended period of time. The Eurosystem also continued to implement measures aimed at supporting the monetary policy transmission mechanism.

The Review notes that growth in the major industrialised economies outside the euro area continued to recover during the third quarter of 2013. Meanwhile, developments in the world's major emerging economies were mixed. Global inflationary pressures remained moderate.

In the euro area, during the third quarter of 2013 economic activity continued to recover moderately, with real gross domestic product (GDP) expanding by 0.1% quarter-on-quarter. The increase reflected a positive contribution from domestic demand. The annual inflation rate based on the Harmonised Index of Consumer Prices (HICP) eased to 1.1% in September and fell further, to 0.8%, in December.

According to Eurosystem staff projections, published in December 2013, real GDP in the euro area is expected to have declined by 0.4% in 2013 as a whole, but is set to expand by 1.1% and 1.5% in 2014 and 2015, respectively. The euro area inflation rate is projected to fall from 1.4% in 2013 to 1.1% in 2014, before rising to 1.3% in 2015.

The Maltese economy expanded by 1.9% in annual terms during the third quarter of 2013, after having grown by 3.3% in the previous quarter. Growth was mainly driven by domestic demand, as net exports increased only marginally. Price pressures in Malta were subdued, with the HICP inflation standing at 0.6% in September unchanged compared with June. Food prices increased at a slower pace, offsetting a less rapid contraction of energy and service prices. In the last quarter of the year, the annual HICP inflation rate increased to 1.0%.

Employment continued to rise in the third quarter of 2013, with the Labour Force Survey (LFS) showing an annual increase of 3.1%, up from 3.0% in the second quarter. The LFS unemployment rate stood at 6.7%, unchanged compared with the previous quarter but up marginally on a year earlier.

During the third quarter, the surplus on the current account of the balance of payments rose slightly compared with the same period a year earlier. This was entirely a result of a smaller merchandise trade deficit. Expressed as a four-quarter moving sum, the current account balance stood at 2.5% of GDP in the year to September, down by 0.6 percentage point over the comparable period a year earlier.

During the fourth quarter of 2013, deposits held by Maltese residents grew at a faster annual pace, while total credit granted to them continued to slow down. Meanwhile, yields on three-month Treasury bills declined. Yields on ten-year government bonds fell, whereas those on five-year government bonds rose. The Malta Stock Exchange share index went up for the seventh quarter in a row.

On the fiscal front, the Review observes that in the third quarter of 2013 the general government deficit widened on a year-on-year basis, as expenditure outpaced revenue. Measured as a four-quarter moving sum, the deficit stood at 4.1% of GDP in September, as against 3.6% in June. The debt-to-GDP ratio also increased, from 75.7% at end-June to 76.6% at end-September.

From a policy perspective, the Review emphasises that the achievement of budgetary targets should be an important priority this year. Additional improvement with fiscal consolidation is also necessary to achieve the medium-term objective of a balanced budget and to reduce the debt ratio substantially. Efforts to achieve prudent fiscal targets would be facilitated by a sustainable rate of economic growth. This necessitates a competitive economy able to retain its share in export markets. In turn, this implies that wage growth needs to be aligned with productivity and structural reforms must be pursued.

The positive performance of the Maltese financial system during the first half of 2013 is reflected by the profit performance of the core domestic banks. Liquidity remained ample, as their deposits increased further. Credit to the private sector, however, continued to contract, driven by developments in lending to non-financial corporations. Given profitability levels, the Review observes that there is perhaps some scope for a lowering of bank lending rates in response to the recent cuts in official interest rates. This would favour credit growth and spur economic activity.

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