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13/11/2018

Central Bank of Malta Quarterly Review – Fourth Issue 2018

The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2018, which analyses economic and financial developments in Malta and abroad during the second quarter of 2018. This issue also reports on the main findings on the expenditure patterns of households in Malta and Gozo based on the latest Household Budgetary Survey and on the evolution of the local tourism industry. Additionally, the Review includes a study on labour market flows and their use in forecasting the unemployment rates, and the transcript of a public lecture by Nicholas Barr, professor of Public Economics at the London School of Economics, on Welfare State: Necessity Not Luxury, held at the Central Bank of Malta on 11 September 2018.

Commenting on the latest economic developments, the Review notes that the Maltese economy retained its momentum during the second quarter of 2018, with real gross domestic product (GDP) rising by 5.9% on an annual basis, after growing by 4.9% in the first quarter of the year. Economic activity was driven by domestic demand, as the contribution from net exports was negative. Growth was more than double that registered in the euro area as a whole.

On the other hand, potential output growth moderated slightly to 5.4% during the June quarter, from 5.8% in the previous quarter, although it remained relatively elevated from a historical perspective. The positive output gap, measured as a four-quarter moving average, is estimated to have largely closed during the quarter under review, with the economy no longer operating above its productive capacity over the recent period.

The Bank's Business Conditions Index eased marginally to 0.7 during the quarter under review, but continued to indicate above-average economic conditions. It also suggests that economic conditions are gradually returning towards average levels, following the exceptionally high GDP growth rates seen in the recent past.

The labour market remained favourable, with strong increases in employment and further falls in the unemployment rate. According to the Labour Force Survey, the unemployment rate stood at 3.8% in the second quarter of 2018, marginally lower than that recorded in the same period a year earlier.

Price pressures, measured by the Harmonised Index of Consumer Prices (HICP), rose to 2.0% in June, in line with HICP inflation in the euro area, which also accelerated to 2.0%. The recent acceleration in HICP inflation in Malta largely reflects the statistical impact of a large increase in the weight of accommodation services in the HICP basket for 2018 arising from the strong growth in tourism. In contrast, the Bank's measure of core inflation decelerated to 0.8% in June, while the Retail Price Index, which is unaffected by the expenditure of tourists in Malta, rose only moderately and remains low at 1.0% in June.

The current account of the balance of payments remained in surplus, although this narrowed when compared with the corresponding quarter of the previous year. The lower surplus reflected a widening in the merchandise trade gap as well as lower net inflows from secondary income. These offset higher net services receipts and lower net outflows related to primary income.

The general government balance returned to a surplus during the second quarter of 2018. When measured as a four-quarter moving sum, the general government balance as a percentage of GDP rose to 3.9%, from 3.1% at the end of March. Meanwhile, general government debt as a share of GDP declined by 0.9 percentage points to 49.6%.

Growth in Maltese residents' deposits with monetary financial institutions operating in Malta moderated further during the June quarter. At the same time, credit growth continued to pick up, as credit to residents outside general government grew at a faster pace. Growth in mortgage loans to households remained strong while growth in bank loans to non-financial corporations (NFC) showed further signs of recovery. Meanwhile, the Bank's Financial Conditions Index deteriorated slightly when compared with the previous quarter, although the extent of tightness is comparable to that estimated at the start of 2017.

The Review also recalls the latest monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the second quarter 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 at 0.00%, 0.25% and -0.40%, respectively. These rates are expected to remain at their current levels at least through the summer of 2019 and as long as necessary.

The Council also confirmed that the purchases under the asset purchases programme (APP) will continue at the monthly pace of €30 billion until the end of September 2018. The monthly pace of these purchases was then to be reduced to €15 billion until the end of December 2018. These purchases were to end thereafter.

The Council has also confirmed that it will continue to invest the principal payments from maturing securities purchases under that APP for a prolonged period of time after the end of its net asset purchases, and in any case for as long as required to keep favourable liquidity conditions and an ample degree of monetary accommodation.

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

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