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11/11/2020

Central Bank of Malta Quarterly Review – Fourth Issue 2020

The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2020. This edition analyses economic and financial developments in Malta and abroad during the second quarter of 2020. Hence, the information presented reflects the impact of the containment measures introduced to stem the spread of COVID-19.

The Review notes that real GDP fell by 16.2% in annual terms in the second quarter of 2020, following a 1.4% increase in the first quarter of the year. The fall in GDP was underpinned by a sharp drop in both domestic demand and net exports. Data on gross value added show that although activity declined across most sectors, the contraction was largely driven by the services sector. The economic contraction in the second quarter of the year is the strongest on record, having exceeded slightly a fall in real GDP of 14.9% in the euro area.

Potential output growth moderated to 2.8%, from 3.8% in the previous quarter. This is the lowest growth in potential output since 2003. When measured as a four-quarter moving average, the output gap was estimated at -4.5% in the second quarter of 2020, well below the 0.2% estimated in the previous quarter.

The Bank’s Business Conditions Index declined sharply during the second quarter of the year, primarily reflecting the exceptionally difficult economic environment triggered by the COVID-19 containment measures and the sharp contraction in economic activity. The fall in the index suggests that economic conditions continued to drift significantly below their long-term average.

Labour market conditions softened, reflecting the impact of the COVID-19 pandemic. Employment rose on an annual basis, but at a much slower rate than in the first quarter. Likewise, the labour force increased more slowly when compared with the previous three months, as the pandemic triggered an increase in the number of inactive persons and a decline in the working age population. The unemployment rate based on the Labour Force Survey rose to 4.4% from 3.6% a year earlier and in the first quarter of 2020, but remained well below the average rate for the euro area – which stood at 7.2%. The impact of COVID-19 containment measures on unemployment was mitigated by government measures aimed at protecting employment, such as the Wage Supplement Scheme, as well as firms’ reliance on shorter working-time arrangements.

Annual inflation as measured by the Harmonised Index of Consumer Prices moderated to 1.0% in June, from 1.2% in March, driven by slower growth in the prices of energy and services. Annual inflation based on the Retail Price Index – which only takes into account expenditure of Maltese residents – eased to 0.7%.

With regard to public finances, the general government recorded a deficit, in contrast to the surplus registered a year earlier. The deterioration in public finances largely reflects the negative impact of the COVID-19 pandemic on activity and tax revenue, while fiscal support measures boosted a number of government expenditure items. When measured on a four-quarter moving sum basis, the general government registered a deficit of 5.1% of GDP. Meanwhile, the general government debt-to-GDP ratio rose to 51.1%, from 44.4% in the first quarter of 2020. Net financial worth as a share of GDP worsened, as an increase in the stock of financial assets held by Government was offset by a larger rise in financial liabilities.

The Review presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the second quarter of 2020, the Council maintained its highly accommodative monetary policy stance. Furthermore, the ECB announced a package of additional monetary policy measures to mitigate the economic disruption and heightened uncertainty brought about by the pandemic. These measures, along with unprecedented action by supervisors and fiscal authorities, should help sustain a steady flow of credit to the private sector and support the return of economies to a recovery path.

In the absence of data on tourist arrivals during the second quarter of 2020, the Review analyses the local tourism sector during the quarter by using alternative data sources. It outlines government measures directed at tourism-related sectors in view of containment measures and briefly looks at data for July and August. It also presents a framework which quantifies the effect of various supply-side factors on GDP growth in EU countries. Furthermore, it analyses developments in the transportation and storage sector in Malta over time. Finally, it provides an overview of the use of ATMs for cash withdrawals in Malta between 2010 and 2019.

The fourth issue of the Quarterly Review for 2020 is available on the Bank’s website.

QR-2020:4 - Infographic (EN)

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