Central Bank releases second issue Quarterly Review
The Central Bank of Malta has published the second issue of its Quarterly Review for 2009, which analyses economic and financial developments both in Malta and abroad during the first quarter of 2009 and going into the second quarter. The Review also presents the Bank’s latest economic projections, which show real GDP growth contracting by 0.6 per cent in 2009, before recovering by a similar margin in 2010. The Bank also expects HICP inflation to ease to 2.2 per cent in 2009, mainly as a result of lower energy prices. The downward trend in inflation is forecast to persist in 2010. On account of the continuing uncertainty about the depth and duration of the global economic crisis, the Review stresses that the Bank’s projections are subject to change, with risks remaining on the downside.
The Review first describes recent international economic and financial developments. It then reports on the ECB’s monetary policy stance, and notes that the Governing Council lowered the interest rate on its main refinancing operations (MRO) twice during the first quarter of the year, for a cumulative drop of 100 basis points, bringing the rate down to 1.50 per cent by end-March. These moves were driven by lower inflationary pressures, stemming from weaker economic activity and a fall in commodity prices. The ECB lowered its main policy interest rate further in April and May by a total of 50 basis points, to 1.00%, but left the rate unchanged in May and June. Additionally, the ECB implemented further non-standard monetary policy measures to enhance liquidity and support the extension of credit by banks in the euro area.
The Review notes that in the first quarter of 2009, output in the major industrial economies contracted, while activity in emerging economies slowed down as the global recession deepened. Additionally, inflationary pressures continued to ease in response to declining energy prices and weak economic activity. In the euro area, real GDP contracted sharply in the first three months of 2009, as domestic demand declined and the contribution from net exports became more negative. Meanwhile, the annual rate of inflation, as measured by the Harmonised Index of Consumer Prices (HICP), continued to ease, dropping to 0.6 per cent in March, before turning negative and reaching -0.1 per cent in June.
The Review notes that the June 2009 Eurosystem staff projections for the euro area point to annual real GDP growth between -5.1 per cent and -4.1 per cent this year while inflation is expected to range between 0.1 per cent and 0.5 per cent.
Turning to the performance of the Maltese economy, the Review notes that in the first quarter economic activity continued to contract, with real GDP falling by 3.3 per cent on a year earlier. This resulted mainly from lower exports and investment, coupled with a decline in private and government consumption. However, with imports falling substantially, net exports contributed positively to GDP growth. Whereas business sentiment and consumer confidence surveys continued to deteriorate during the first three months of the year, business confidence improved in the following quarter.
Meanwhile indicators from the labour market were mixed, with employment during the quarter increasing by 2.2 per cent on a year earlier while unemployment rose steadily increasing further in May.
As regards price developments, inflation eased during the first quarter, although it remained high compared with the average rate in the euro area. Annual HICP inflation fell from 5.0 per cent in December to 3.9 per cent in March. More moderate increases in prices of non-energy industrial goods, energy and services offset faster growth in food prices. The pace of inflation continued to decline thereafter, reaching 2.8 per cent in June.
During the first quarter Malta experienced gains in external competitiveness as a result of favourable exchange rate movements. Unit labour costs continued to rise however, driven up by higher compensation per employee and a drop in labour productivity.
In analysing the external account the Review observes that over the survey period the current account deficit widened considerably compared with a year earlier. This was spurred by a deterioration on the income account, a negative outturn on transfers and a smaller surplus on services, which outweighed a narrower merchandise trade gap. Meanwhile, a large surplus was recorded on the capital and financial account.
Regarding fiscal developments, the Review notes that during the first quarter the general government deficit narrowed on an annual basis, as expenditure fell and revenue increased marginally. However, partial information from the Consolidated Fund, which is compiled on a cash basis, shows a widening deficit as a result of growing expenditure and a fall in revenue.
The contribution of Maltese MFIs to the euro area broad money stock decreased during the first three months of the year, as residents’ deposits contracted. According to the Review, this could have resulted from a fall in interest rates on bank deposits and a switch from term deposits into debt securities, as a number of bond issues were launched in the primary market. Additionally, credit to residents grew at a slower pace, while foreign assets, that is net claims on non-residents of the euro area, fell. In the domestic financial markets, short-term yields persisted on their downward trend while those on long-term government securities increased. On the other hand, the downward trend in equity prices was reversed going into the second quarter.
From a policy perspective, the Review highlights the Eurosystem’s robust monetary policy response to the economic crisis. However, it points out that fiscal room for manoeuvre in Malta is limited by the relatively high deficit and debt levels and the need to comply with EU fiscal rules. The Review argues that fiscal consolidation should be pursued further through effective expenditure control.
Looking beyond the current downturn, it emphasises that the pursuit of structural reforms will be the key to determining the strength of the eventual recovery. Hence, it will be crucial to ensure that competitiveness is enhanced and rigidities in product markets are addressed through increased competition.
The second issue of the Quarterly Review for 2009 is available on the website of the Central Bank of Malta at www.centralbankmalta.org