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News - Media Releases 2019

17/05/2019

Central Bank of Malta Quarterly Review – Second Issue 2019

The Central Bank of Malta has published the second issue of its Quarterly Review for 2019, which analyses economic and financial developments in Malta and abroad during the fourth quarter of 2018. This issue includes a study on an alternative approach which supplements the pure production function used by the Bank to estimate potential output. The Review also analyses the length of stay of foreigners in the Maltese labour market over the period 2002-2017. Additionally, this edition reports on the results for Malta of the European Investment Bank Group Survey on Investment and Investment Finance that was carried out in the second quarter of 2018.

With regard to the latest economic developments, the Review notes that growth in the Maltese economy accelerated during the fourth quarter of 2018, with real gross domestic product (GDP) rising by 7.2% in annual terms, following a 7.1% increase in the third quarter of the year. Economic activity was driven by domestic demand, as the contribution from net exports was slightly negative. Annual GDP growth in Malta was more than five times that recorded in the euro area.

In contrast to GDP growth, potential output growth eased to 5.3% in the last quarter of 2018, from 5.8% in the preceding quarter, although it remained elevated from a historical perspective. As a result, the positive output gap, measured as a four-quarter moving average, widened compared with the third quarter and in the corresponding quarter a year earlier. Although the degree of overutilisation of the economy's productive capacity increased, it remained below the levels estimated for 2015 and 2016. The Bank's Business Conditions Index stood unchanged from its value in the third quarter of 2018 and in the last quarter of 2017, and continued to suggest above-average conditions.

The labour market remained robust, as employment grew strongly and the unemployment rate fell further. According to the Labour Force Survey, the unemployment rate stood at 3.5% in the fourth quarter of 2018, lower than the rate recorded in the same quarter a year earlier. It also remained below the Bank's structural measure of 4.1% and continued to suggest a degree of tightness in the labour market.

Consumer price pressures moderated. The annual rate of inflation measured by the Harmonised Index of Consumer Prices (HICP) stood at 1.2% in December, down from 2.5% in September. This moderation was driven by services inflation, which had risen sharply earlier in the year following a revision in the weight of services related to tourism. The Retail Price Index (RPI), which only takes into account expenditure by Maltese residents and was thus unaffected by this revision, eased marginally, going from 1.6% in September to 1.5% in December. In contrast, the Bank's measure of core inflation accelerated from 0.7% to 1.1% over this period. As a result, the gap between the core and the overall inflation rate narrowed.

While consumer price pressures moderated, producer prices continued to increase at a brisk pace. Malta's unit labour cost (ULC) also continued to grow, though the annual rate of change eased when compared with previous quarters. Meanwhile, Malta's harmonised competitiveness indicators (HCIs) indicated a further annual loss in competitiveness, although lower indices at end of year relative to September suggest that the deterioration in external competitiveness seen in recent years may have started to reverse.

During the last quarter of 2018 the current account surplus narrowed marginally when compared with the corresponding quarter a year earlier. The lower surplus reflected a widening of the merchandise trade gap, as net outflows from primary and secondary income declined, while the surplus on services edged up marginally. The cyclically-adjusted balance also remained in surplus.

The general government surplus narrowed when compared with the same period of 2017, as expenditure outpaced revenue by a large margin. When measured as a four-quarter moving sum, the general government surplus as a percentage of GDP fell to 2.0% from 3.4% observed at the end of 2017 and in the third quarter of 2018. Meanwhile, general government debt as a share of GDP was unchanged from three months earlier, although it continued to decline on an annual basis. It closed the year at 46.0% of GDP.

Residents' deposits with monetary financial institutions operating in Malta expanded at a faster pace during the December quarter. Similarly, credit growth continued to pick up, reflecting faster growth in credit to residents outside general government. Growth in loans for house purchases remained strong, while loans to non-financial corporations (NFC) accelerated. Meanwhile, the Bank's Financial Conditions Index (FCI) remained tight from a historical perspective, and deteriorated when compared with the third quarter of 2018.

The Review presents an overview of the latest monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the last quarter of 2018, the Council maintained an 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. The Council reiterated that it expected key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure the continued sustained convergence of inflation at levels below but close to 2% over the medium term. Nonetheless, on 7 March 2019 the Governing Council announced that key ECB interest rates are expected to remain on hold until at least the end of 2019.

As of October 2018, net purchases under the asset purchases programme (APP) were carried out at an average monthly pace of €15 billion. Net purchases continued at this pace until the end of December and then ended.

In October the Council reaffirmed its intention to continue reinvesting, in full, the principal payments from maturing securities under the APP for an extended period of time after the end of the net asset purchases. However, in December it clarified that full reinvestment will continue for an extended period of time after the date when it starts raising key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

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

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