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Central Bank of Malta Quarterly Review – Third Issue 2018

The Central Bank of Malta has published the third issue of its Quarterly Review for 2018, which analyses economic and financial developments in Malta and abroad during the first quarter of 2018. This issue includes for the first time assessments of economic activity made on the basis of a number of indicators compiled by the Central Bank of Malta, in addition to the usual commentary on officially released national statistics. These include measures of potential output, business conditions, structural unemployment and financial conditions prevailing in the Maltese economy.

A report of the proceedings of the conference organised on 4 May 2018 to commemorate the Central Bank of Malta's 50th anniversary with the theme "Central Banks in Historical Perspective: What Changed after the Financial Crisis?" is featured in the Review. This edition also presents an overview of Maltese households' expenditure patterns according to the Household Budgetary Survey as well as an article on the determinants of labour productivity in Malta based on a firm-level survey.

The Maltese economy continued to grow strongly during the first quarter of 2018, with real gross domestic product (GDP) rising by 4.4% on an annual basis, after growing by 4.6% in the last quarter of 2017. Economic growth was driven by net exports. Domestic demand contracted, as increases in private and government consumption were offset by a decrease in gross fixed capital formation. Growth was double that registered in the euro area as a whole.

The moderation in GDP growth, compared with that in the fourth quarter of 2017, reflected a pull-back from the high level of activity recorded in previous years, especially in respect to potential output, where the latter is estimated to have stood at 4.5% in the first quarter of this year. The Bank's measure of the output gap indicates that the extent of overutilization of the economy's productive capacity has decreased from the high levels recorded in 2015 and 2016, but remains at a level that is close to that prevailing in 2017. The Bank's Business Conditions Index remained positive, with the average reading for the first three months of the year standing at 0.5. This compares with 1.0 in the last quarter of 2017.

The labour market remained robust, with strong increases in employment and further falls in the unemployment rate. According to the Labour Force Survey, the unemployment rate stood at 4.4% in the first quarter of 2018, below the structural measure of 4.8%. Hence, it continued to suggest a degree of tightness in the labour market.

Price pressures remained contained, with the annual rate of inflation, measured by the Harmonised Index of Consumer Prices (HICP), standing at 1.3% in March, the same rate as that registered in December. HICP inflation in March was equal to the euro area average. The Bank's measure of core inflation stood slightly below the headline rate, ending the quarter at 1.1%.

The current account of the balance of payments remained in surplus. This reflected a higher surplus on services, though there also was a narrowing of the merchandise trade deficit. The Bank's analysis suggests that the strong balance of payments position reflects structural rather than cyclical developments.

A similar assessment holds for public finances. During the first quarter of 2018 the general government registered a deficit for the first time in two years, though this reflected a one-off transaction which boosted expenditure growth over that observed in government revenue. Indeed, when measured as a four-quarter moving sum, the general government balance showed a surplus of 3.3% of GDP. Meanwhile, general government debt as a share of GDP continued to decline, falling slightly to 50.4% at the end of March, from 50.7% at the end of 2017.

Residents' deposits with monetary financial institutions operating in Malta rose at a slower pace compared with December, partly reflecting weaker growth in overnight deposits. At the same time, credit growth picked up, as credit to residents outside general government accelerated. Growth in mortgage loans to households remained strong, while growth in bank loans to non-financial corporations (NFC) showed the first signs of recovery after an extended period of decline. Meanwhile, the Bank's Financial Conditions Index continued to signal broadly neutral financial conditions from a historical perspective.

The Review presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the first three months of the year, the Council continued with its accommodative monetary policy stance. The interest rates on the main refinancing operations (MRO), on the marginal lending facility and on the deposit facility were kept unchanged. The Council confirmed that it continued to expect these rates to remain at their current levels for an extended period of time and well past the horizon of the net asset purchases.

In June, the Council clarified that key ECB interest rates are expected to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that inflation continues to develop in line with the current expectations of a sustained adjustment path. It also announced that after September 2018, the monthly pace of net asset purchases would be reduced from €30 billion to €15 billion, with these purchases ending in December 2018.

However, principal payments from maturing securities purchased under the APP will be reinvested for a prolonged period of time after the end of its net asset purchases, and in any case for as long as required to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The third issue of the Quarterly Review for 2018 is available on the website of the Central Bank of Malta.

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