Central Bank of Malta Quarterly Review – First Issue 2009
The Central Bank of Malta has published the first issue of its Quarterly Review for 2009, which analyses economic and financial developments during the fourth quarter of 2008 and the initial months of 2009.
Reporting on monetary policy in the euro area, the Review notes that the European Central Bank lowered the interest rate on its main refinancing operations (MRO) on three occasions in the last quarter of 2008, for a cumulative drop of 175 basis points, bringing the rate down to 2.50 per cent by the end of December. These moves followed an intensification of the financial market turmoil, the deteriorating economic outlook and the consequent reduction in risks to price stability. In the five months to May 2009, the interest rate on the MRO was cut on four other occasions, to 1.00 per cent, as price pressures eased further.
Responding to the reductions in official interest rates, domestic banks lowered their retail interest rates in the final quarter of 2008. Falling interest rates appeared to have also influenced money and credit developments during this period. Thus, while residents’ deposits contracted, credit to residents of Malta increased at a faster pace. Yields on Maltese government securities decreased, while equity prices continued to fall.
Turning to international economic developments, the Review observes that economic output in the major industrialised countries contracted in the December quarter, as the global recession continued to deepen. Emerging economies were also adversely affected by the downturn, as external demand declined. Meanwhile, inflationary pressures eased as demand weakened and commodity prices fell.
The Review notes that in the euro area, real GDP contracted sharply, as domestic demand fell and the contribution from net exports turned negative. Owing mostly to lower energy and food prices, the annual HICP inflation in the euro area fell to 1.6 per cent in December 2008, and it continued to decrease going into 2009, reaching 1.2 per cent in February.
The global economic downturn also had an impact on the domestic economy. The Review observes that data released in March point to a decline in real GDP on an annual basis in the final quarter of 2008. This was mainly a result of a slowdown in private consumption and reductions in investment and government consumption. However, it also notes that the fourth quarter real GDP growth rate was subsequently revised upwards. In terms of perceptions, business sentiment and consumer confidence surveys weakened further in the final quarter of 2008 and the first quarter of 2009.
Signs of a deteriorating economic environment also showed up in the labour market. Even though employment continued to expand in the twelve months to November, the number of unemployed, which had bottomed out in mid-2008, has been on a general upward trend since.
With regard to price developments, inflation remained high in Malta, in contrast with the euro area. Thus, Malta’s HICP inflation edged up to 5.0 per cent in December, as an acceleration in the rate of growth of food prices offset a slowdown in service price inflation. Going into 2009, however, inflation fell sharply, reaching 3.5 per cent in February. Meanwhile, price pressures were also reflected in measures of Malta’s cost competitiveness. This was particularly the case for unit labour costs, which rose in the final quarter of 2008, as compensation per employee increased faster than labour productivity.
Turning to developments in the balance of payments, the Review notes that the fourth quarter deficit on the current account was marginally higher than in the corresponding quarter of the previous year. This mainly reflected a deterioration in the income account, which outweighed favourable developments in transfers and the goods and services balance. At the same time, significantly higher net inflows were recorded in the capital and financial account.
In its analysis of fiscal developments, the Review reports that the general government deficit widened to 4.7 per cent of GDP in 2008, up from 2.2 per cent in 2007. More than half of this rise was attributable to one-off expenditure items, notably the early retirement schemes for shipyard workers and additional subsidies to the energy sector. Revenue growth moderated.
In sum, the Review comments that in the current unfavourable external environment it is important to keep domestic costs and prices in check. The fact that inflation in Malta remains above that of the euro area is a source of concern which could be addressed, in part, by promoting more competitive product markets and increased labour market flexibility. Progress in these areas would allow the Maltese economy to benefit more from an eventual recovery.
In the case of fiscal policy, the Review argues that room for manoeuvre is limited. Nonetheless, targeted measures that improve the economy’s productive capacity and its cost competitiveness could, to some extent, allow for a more active role of the public sector. It remains important, though, to simultaneously resume the fiscal consolidation process, especially given the growing impact that population ageing is likely to have on public finances.
The first issue of the Quarterly Review for 2009 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.