The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2009, which analyses economic and financial developments in Malta and abroad during the third quarter of 2009 and into the fourth.
The Review commences its analysis with a focus on the monetary policy stance in the euro area, noting that the ECB left the interest rate on the Main Refinancing Operations (MROs) unchanged at 1.00% over the third and fourth quarters, as price developments were expected to remain subdued over the policy-relevant horizon. Additionally, over the same period, the ECB implemented enhanced credit support measures to ease conditions in the financial system. These included, in particular, the provision of liquidity at fixed interest rates with full allotment across a range of maturities. In December, the Governing Council decided to continue conducting its MROs as fixed rate tender procedures with full allotment for as long as needed, and at least until 13 April 2010. However, the ECB also signalled the beginning of a gradual withdrawal of its emergency liquidity support.
The Review then comments on international economic conditions and observes that in the third quarter of 2009 the global economy showed increased signs of recovery. Annual output in the major industrial economies contracted at a slower rate, while the recovery in emerging economies seemed to be more advanced. Moreover, inflationary pressures worldwide remained subdued. Meanwhile, in the euro area, there were growing signs that the significant contraction in economic activity had come to an end in the third quarter. Annual real GDP growth rose to -4.0% from -4.8% in the previous quarter, although unemployment continued to increase. The annual rate of inflation, as measured by the Harmonised Index of Consumer Prices (HICP), was negative throughout the third quarter, but turned positive in November, and ended the year at 0.9%. Looking ahead, the Review observes that the December 2009 Eurosystem Staff Projections for the euro area pointed to annual real GDP growth between 0.1% and 1.5% in 2010, while inflation was expected to range between 0.9% and 1.7%.
Turning to the Maltese economy, the Review notes that the contraction of economic activity appeared to be bottoming out. Real GDP fell by 2.1% on an annual basis, less than the decline recorded in the June quarter. Both private and public consumption recovered, as did investment. However, inventories and net exports contributed negatively to growth. This notwithstanding, surveys among firms in the manufacturing and services sectors showed further signs of stabilisation during the last three months of the year.
With regard to price developments, the Review notes that annual HICP inflation fell considerably during the quarter, from 2.8% in June to 0.8% in September. This reflected a substantial slowdown in the rate of increase in prices of food and services. The annual inflation rate fell further in the following quarter, turning negative in October, and ending the year at -0.4%.
In the labour market, conditions remained weak during the September quarter, with employment declining moderately on a year-on-year basis, while unemployment remained broadly stable during the quarter, after having risen in the first half of the year.
Commenting on developments in the external account, the Review observes that the current account swung into deficit over the three month period to end-September. This was due to a negative outturn on transfers and higher net outflows on the income account, together with a sharp decline in the surplus on services. These movements outweighed a smaller deficit on merchandise trade.
On Malta’s external competitiveness, the Review notes that this remained under pressure as the appreciation of the euro offset the effect of the decline in Malta’s relative inflation rate. Unit labour costs continued to rise, albeit at a slower rate, driven by higher compensation of employees and lower labour productivity. Towards the end of the year, Malta’s competitive position benefited from a combination of a weaker euro and a fall in domestic inflation.
The Review’s analysis of fiscal developments shows that during the first nine months of 2009 the general government deficit widened slightly compared to the same period in 2008, as revenue fell faster than expenditure. In particular, indirect tax receipts declined as a result of weak consumer spending and the slowdown in the property market. The general government debt continued to increase.
In analysing monetary trends, the Review notes that the contribution of Maltese MFIs to the euro area broad money stock declined during the third quarter, as residents’ deposits contracted. At the same time, however, credit to residents continued to expand, albeit more moderately, while net claims on non-residents of the euro area rose. Although official interest rates remained unchanged during the second half of 2009, domestic money market rates and government bond yields declined. On the other hand, equity prices continued to recover.
The Bank’s latest estimates show that the Maltese economy contracted by 2.2% in 2009, as a drop in domestic demand outweighed a positive contribution from net exports. The economy is expected to recover during 2010, with real GDP set to grow by 1.1%. The Bank foresees a further easing in HICP inflation, to 1.7%, in 2010. The Review emphasizes that these forecasts are subject to a high degree of uncertainty, with downside risks to the GDP projections as the global economic situation continues to be volatile.
From a policy perspective the Review states that as the recovery gathers pace attention should turn towards fiscal consolidation, to reduce the deficit in line with the EU’s fiscal rules. At the same time, the Government has an important role in supporting the economy through the provision of an adequate physical infrastructure and further measures to improve the quality of the labour force. The Review stresses that the pursuit of structural reforms also remains necessary to strengthen competitiveness.
The fourth issue of the Quarterly Review for 2009 is available on the website of the Central Bank of Malta at www.centralbankmalta.org
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