Central Bank of Malta Quarterly Review – First Issue 2013

June 18, 2013

The Central Bank of Malta has just published the first issue of its Quarterly Review for 2013, which analyses economic and financial developments in Malta and abroad during the final quarter of 2012, while highlighting some further developments in subsequent months.  The Review carries an article on the Bank’s econometric model of the Maltese economy. It also features a number of boxes, including one on labour market developments in Malta and another on the economic impact of structural reforms.
The Review notes that economic activity in the major industrial countries slowed down during the December quarter. Annual gross domestic product (GDP) growth in the United States, though positive, decelerated significantly when compared with previous quarters. At the same time, Japan and the United Kingdom continued to record near-zero growth. On the other hand, in the emerging economies of Asia, activity recovered from its earlier slowdown, with annual growth accelerating in China and India.
In the euro area, real GDP contracted by 0.9% on a year earlier. Turning to the Maltese economy, the Review notes that the Maltese economy continued to expand in the last quarter of 2012, but at a slower pace than in the previous quarter. Net exports provided the stimulus to growth as domestic demand declined due to lower investment and inventories.  Employment continued to increase during the final quarter of 2012, with the Labour Force Survey showing an annual increase of 3.4%. The survey also shows that the unemployment rate declined to 6.5% from 6.6% a year earlier. Fourth quarter competitiveness indicators were mixed.  Both the nominal and the real harmonised competitiveness indicator increased between September and December, as a result of the appreciation of the euro against other major currencies.  On the other hand, growth in unit labour costs moderated.  Deposits held by Maltese residents grew at a faster pace compared with the previous quarter, whereas credit granted to the private sector slowed down. In its analysis of the fiscal situation, the Review notes that the general government deficit rose to 3.3% of GDP in 2012, compared with 2.8% in 2011, as expenditure outpaced revenue. The general government debt increased from 70.3% of GDP in 2011 to 72.1% in 2012.  Real GDP growth is expected to accelerate from 0.8% in 2012 to 1.4% in 2013 and further to 1.9% in 2014.  Economic growth is expected to be driven by domestic demand, particularly private consumption. The average HICP inflation rate is projected to moderate to 1.4% in 2013 and remain at this level in 2014. Risks to both the growth projections and inflation outlook are seen to be broadly balanced. From a policy perspective, the Bank stresses the importance of implementing measures that would bring the general government deficit back down to below the 3% threshold this year. Fiscal consolidation should continue thereafter to achieve the medium-term objective of a balanced budget and a sustained reduction in the debt ratio, while the domestic fiscal framework needs to be strengthened. The Bank also notes that to sustain economic growth, Malta needs to safeguard its external competitiveness through moderation in wage increases and improvements in productivity.