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11/02/2019

Central Bank of Malta Quarterly Review – First Issue 2019

The Central Bank of Malta has published the first issue of its Quarterly Review for 2019, which analyses economic and financial developments in Malta and abroad during the third quarter of 2018. This issue also includes a comparative analysis of labour market slack in Malta with that in the euro area based on both the official unemployment rate and a broader measure of labour market slack.

Additionally, the Review includes a study on the evolution of the housing stock in Malta as well as an analysis of long-term trends in the wholesale and retail sectors and their role in the Maltese economy. This issue also carries the transcript of a public lecture by Dr Stefano Siviero, Head of the Economic Outlook and Monetary Policy Directorate at the Bank of Italy on Unconventional Monetary Policy in the Euro Area: Macroeconomic Context, Effectiveness, Unintended Consequence, and Normalisation, held at the Central Bank of Malta on 29 October 2018.

A transcript of the speech Dynamic but Vigilant delivered by the Central Bank of Malta Governor at the annual dinner of the Institute of Financial Services is also included in this issue.

As regards economic developments during the third quarter of 2018, the Review notes that the Maltese economy grew at a fast pace, with real gross domestic product (GDP) rising by 7.5% in annual terms, following a 6.2% increase in the preceding quarter, more than four times the rate recorded in the euro area as a whole. The economic expansion was largely driven by domestic demand, although the contribution of net exports was also positive.

In contrast to GDP growth, potential output growth eased slightly to 5.4% during the quarter under review, from 5.7% in the second quarter of 2018. The positive output gap, measured as a four-quarter moving average, widened during the quarter under review, though the degree of overutilization of the economy's productive capacity remained similar to levels estimated for the same quarter of 2017 and below those in 2015 and 2016.

The Bank's Business Conditions index rose marginally compared with the preceding quarter and continued to signal above-average conditions. The latest estimates suggest that economic conditions appear to be broadly stable over the quarter, even if less strong than in 2014 and 2015.

Labour market conditions remained favourable, with strong increases in employment and further falls in the unemployment rate. According to the Labour Force Survey, the unemployment rate fell to 3.7% in the third quarter of 2018, notwithstanding a further increase in labour market participation rates and rising foreign employment.

The annual rate of inflation, measured by the Harmonised Index of Consumer Prices (HICP), accelerated to 2.5% in September from 2.0% three months earlier, largely on account of a higher contribution from food prices, although non-energy industrial goods and energy inflation also edged up. HICP inflation stood above that in the euro area, which ended the third quarter at 2.1%. Inflation based on the Retail Price Index (RPI), which only takes into account purchases by Maltese households rose to 1.6% in September, from 1.0% in June. In contrast, the Bank's measure of core inflation edged down to 0.7%. The lower core inflation vis-à-vis overall inflation suggests that HICP inflation is largely driven by strong growth in the prices of selected volatile subcomponents.

Cost pressures for producers moderated. Annual growth in the Producer Price Index fell to 3.8% in September from 6.6% three months earlier. Malta's unit labour cost index, as measured on a four-quarter moving average basis, also decelerated. In contrast, Malta's Harmonised Competitiveness Indicators indicated a further deterioration in external competitiveness, owing to unfavourable exchange rate and relative price developments.

The surplus on the current account of the balance of payments widened during the third quarter of 2018. This reflected a higher net surplus from trade in services. The Bank's measure of the cyclically-adjusted current account was similar to the headline measure. This suggests that this surplus largely reflects structural factors other than the economy's cyclical position.

As regards public finances, the general government surplus decreased when compared with a year earlier. This was largely due to a significant increase in primary expenditure which offset that in revenue. When measured as a four-quarter moving sum, the general government surplus-to-GDP ratio fell to 3.6% in the third quarter from 3.9% in the preceding three months. Meanwhile, general government debt as a share of GDP declined further by 3.1 percentage points to 45.9%.

Residents' deposits with monetary financial institutions operating in Malta continued to expand during the third quarter of 2018. At the same time, credit growth picked-up, reflecting faster growth in credit to residents outside general government. Growth in mortgage loans to households remained strong, while growth in bank loans to non-financial corporations showed further signs of recovery. Meanwhile, the Bank's Financial Conditions Index improved, although it continued to signal tight conditions by historical standards.

The Review presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the third quarter of 2018, the Council continued with its accommodative monetary policy stance. The interest rates on the main refinancing operations, on the marginal lending facility and on the deposit facility were kept unchanged. The Governing Council also reiterated that it continued to expect key ECB interest rates to remain at their present levels at least through the summer of 2019.

In line with the Council's decision, purchases under the asset purchase programme (APP) continued at the monthly pace of €30 billion until the end of September 2018. As of October, these purchases were carried out at a monthly pace of €15 billion. Asset purchases continued until the end of December and then ended.

The Council also re-affirmed that it intends to continue reinvesting in full the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. In December, it clarified that this policy will continue for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary.

The first issue of the Quarterly Review for 2019 is available on the website of the Central Bank of Malta.

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