Central Bank expects growth to fall short of projections

The Central Bank said yesterday it was making a downward revision of economic growth projections for this year to take account of a weaker export performance and slower growth in private consumption expenditure.

The bank, in its annual report published last month, had projected growth of between 3.1 per cent and 3.7 per cent during 2003, from 2.2 per cent last year (excluding inventory changes).

"This growth was expected to result from a resumption of investment spending and, to a lesser extent, of export growth. Those forecasts were based on a cautiously optimistic view of the likely economic developments in the major industrial countries during the year," the bank said.

But, it added, since the forecasts were made, projections for economic growth in the major industrial economies were adjusted downwards.

"Consequently, the Central Bank is reviewing its outlook for 2003 to take into account a weaker export performance and slower growth in private consumption expenditure."

The bank said, however, that its inflation forecast remained unchanged, with the 12-month moving average rate expected to drop to between 1.4 per cent and 1.8 per cent by the end of the year.

"In sum, developments in the Maltese economy during the current year depend crucially on two factors: the pace of recovery in Malta's major trading partners and the behaviour of Maltese consumers. If the recovery abroad does not materialise, the prospects for growth will be limited. Furthermore, if households choose to increase their savings, and the savings ratio stabilises or even increases, domestic demand will be weaker. Thus, in both cases, the risks to growth connected with the forecast are on the downside."

The bank made its comments in the Quarterly Review - March 2003.

The review analyses economic and financial developments both in Malta and abroad during the fourth quarter of 2002 and includes the results of the latest business perceptions survey carried out between January and February 2003.

The review comments on the bank's monetary policy stance particularly its decision to cut the central intervention rate and the discount rate by 25 basis points to 3.75 per cent in December 2002.

It notes that this decision was supported by the fact that despite a stable interest differential on the Maltese lira, the Central Bank's net foreign assets continued to expand. Although the bank's external reserves rose further into the March quarter, they did so at a slower pace.

Consequently, in the light of increased volatility in international financial markets and the prevailing climate of uncertainty that preceded the war on Iraq, the bank decided to maintain an unchanged monetary policy stance throughout the first quarter of 2003.

The review then focuses on developments in the real economy and observes that during the fourth quarter of 2002, the recovery in economic activity in Malta stalled as real GDP rose by only 0.2 per cent when compared to the same quarter in 2001.

While exports of electronic components continued to rise sharply and earnings from tourism increased by more than 15 per cent, there was also a deceleration in domestic demand and in the export turnover of some manufacturing sub-sectors.

In addition, inventories decreased further, lowering economic growth. This unexpected fall in inventories, which included a residual element, was the main reason why the bank's estimate of GDP growth for 2002, published in its annual report, differed from the official data published subsequently by the National Statistics Office. The bank had estimated 2002 GDP growth at 3.1 per cent while the NSO's estimate was 1.0 per cent. When inventory changes were excluded, the bank's estimate was of 2.2 whereas that of the NSO was 2.0 per cent.

During the two months to November 2002, the unemployment rate edged upwards to 5.4 per cent from 5.2 per cent, as the gainfully employed population grew at a slower pace than the labour supply. However, unemployment data for February 2003 indicated that the number of people registering for work dropped by two per cent following this period.

Inflationary pressures continued to subside with food prices once again the main factor behind the downward trend in retail price inflation.

As a result, the year-on-year change in the RPI fell from 1.29 per cent in September to a 10-year low of 0.32 per cent as at end December.

Turning to the balance of payments, the review observes that during the fourth quarter the shortfall on the current account was slightly smaller than that registered in the corresponding period a year earlier.

The merchandise trade gap narrowed as export growth outstripped the expansion in imports. Additionally, the surplus on the services account widened, on account of a rise in net travel receipts.

Meanwhile, net inflows on the capital and financial account, excluding movements in the official reserves, persisted into the fourth quarter although at a slower pace than in the corresponding quarter of 2001. As a result, the official reserves rose further.

With regard to monetary developments, the review highlights the fact that credit growth remained weak during the last quarter of 2002.

This weakness, combined with a drop in the net foreign assets of the banking system, resulted in a slower rate of monetary expansion during this period. The slowdown in monetary growth continued into January notwithstanding a recovery in the banking system's net foreign assets.

The March issue of the Quarterly Review is available on the website of the Central Bank of Malta.

www.centralbankmalta.com