18/12/2014

Central Bank of Malta Quarterly Review – Third Issue 2014

The Central Bank of Malta has published the third issue of its Quarterly Review for 2014, which reports on economic and financial developments in Malta and abroad during the second quarter of 2014, while commenting also on developments in subsequent months. The Review also features a number of analyses that focus on core inflation measures in Malta, the fiscal component of the Bank's macroeconometric model and the statistical impact of the European System of Accounts (ESA) 2010 on economic and financial data.

The Review notes that the Governing Council of the European Central Bank (ECB) maintained an accommodative monetary policy during the second half of 2014. The ECB lowered its key interest rates in September, with the interest rate on the main refinancing operations being cut to 0.05%, while the rates on the marginal lending facility and on the deposit facility were decreased to 0.30% and -0.20%, respectively. These decisions reflected the persistent low inflation outlook, the loss of momentum of the economic recovery in the euro area and continued weak monetary and credit dynamics.

This accommodative stance was enhanced by further non-standard measures. Thus, two new programmes were announced that involve the purchase of securities denominated in euro, issued by euro area residents under two specific programmes. The ECB also began to implement the targeted longer-term refinancing operations that were announced in June.

The Review observes that in the second quarter of 2014, global economic growth remained sluggish, as was also the case in the euro area, where growth in gross domestic product (GDP) was only 0.1% in the second quarter, down from 0.3% in the second quarter. Euro area growth was mainly driven by private and government consumption as investment fell. Meanwhile net exports only made a small positive contribution to growth.

The annual inflation rate in the euro area based on the Harmonised Index of Consumer Prices (HICP) remained muted during the period surveyed. In June, it was practically unchanged compared with March, at 0.5%. By September it had fallen to 0.3%.

According to the ECB staff projections published in September, real GDP growth in the euro area was expected to turn positive and stand at 0.9% in 2014. It was then projected to accelerate to 1.6% in 2015 and 1.9% in 2016. The annual inflation rate was expected to fall to 0.6% in 2014, before rising to 1.1% and 1.4% in 2015 and 2016, respectively.

Turning to domestic economic developments, the Maltese economy continued to expand, with real GDP rising by 2.6% in annual terms in the June quarter. Growth was mainly driven by domestic demand, particularly government and private consumption. Net exports had a more limited impact. 

The Review also carries a supplement on developments in GDP in the third quarter of 2014. In annual terms, real GDP growth accelerated to 3.8%, reflecting mainly developments in private and government consumption.

Consumer price inflation decreased substantially in the second quarter of 2014. The annual HICP inflation rate fell to 0.7% in June, from 1.4% in March, reflecting mainly developments in energy and food prices. By September, inflation dropped further to 0.6%.

Employment continued to rise in the second quarter of 2014, with the Labour Force Survey (LFS) showing an increase of 1.2% on the preceding year, following a rise of 1.9% in the previous three-month period. In the second quarter, the LFS unemployment rate declined when compared with the preceding quarter standing at 5.8%.

In the external sector, the surplus on the current account of the balance of payments registered in the second quarter of 2014 widened on a year earlier. This was attributed to a decline in net outflows related to income, and an improvement in the positive balance on goods and services. In the year to June, the current account surplus stood at 5.3% of GDP.

Monetary developments were characterised by a substantial rise in resident deposits. In September, these grew by 12.9% on their level a year earlier, a faster pace than the 10.3% rate recorded in June. Meanwhile, credit granted to residents contracted at a faster pace during the third quarter, mainly reflecting weaker growth in credit to general government and also a steeper fall in credit to other residents.

In the domestic financial markets, yields on government securities were lower across the whole spectrum. At the end of September secondary market interest rates on three-month Treasury bills, five-year bonds and ten-year bonds had fallen to 0.09%, 1.00% and 2.26%, respectively. Meanwhile, the Malta Stock Exchange share index rose marginally.

In its analysis of the fiscal situation, the Review notes that in the second quarter of 2014, the general government deficit widened on a year earlier, as expenditure outpaced revenue. The Review also refers to the official fiscal targets presented in the Budget 2015, which foresee the deficit ratio for 2014 falling to 2.1% and the debt ratio rising to 70.1%. In 2015 they are expected to decline further to 1.6% and 69.0% respectively.

The Review also presents the Bank's latest economic projections, which were concluded in November. Real GDP growth is expected to accelerate from 2.5% in 2013, to 3.0% in 2014, before easing to 2.8% in 2015. Growth is expected to be driven by domestic demand. HICP inflation is projected to ease from 1.0% in 2013 to 0.8% in 2014 before accelerating to 1.3% in 2015. Risks to both growth and inflation projections appeared to be balanced.

With reference to the Maltese financial system the Review notes that this remained sound, as reflected in a further strengthening of capital buffers of core domestic banks in the second quarter of 2014. Liquidity levels remained ample and residents' deposits continued to grow. In this regard, the comprehensive assessment of banks carried out by the ECB did not identify any capital shortfalls for the three participating banks that operate in Malta. Given the banks' healthy position, the Review observes that there may be scope for increased lending to the private sector that would support economic expansion.

The third issue of the Quarterly Review for 2014 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.

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