Firms' short-term expectations improve

The Central Bank's latest business perceptions survey, carried out between January and February, showed an improvement in firms' expectations about the general economic situation and their own short-term prospects.

The majority of participants reported unchanged investment plans, though on balance they were more likely to increase their investment spending, the bank reported in the Quarterly Review - First Issue 2006.

Despite expected economic improvement, respondents also anticipated a rise in unemployment over the coming six months and an acceleration of inflation, the bank said.

In their outlook for the first quarter of this year, respondents said they were expecting a pick-up in their activity. Sales as well as prices were expected to rise, but with labour costs also predicted to edge up, profitability was expected to remain stable.

Domestically oriented firms were expecting higher sales and selling prices and profitability growth. Exporters saw stable sales, higher labour costs and slight downward pressure on their selling prices, causing profitability to contract.

The Quarterly Survey reports that Malta's economy continued to expand during the fourth quarter of last year as real GDP grew by 2.8 per cent on a year-on-year basis from 4.1 per cent in the previous quarter.

The review states that inventory accumulation and investment spending were the main contributors to growth, which was dampened by a reduction in government consumption and net exports.

In the manufacturing sector, activity remained subdued, largely due to reduced exports of semiconductors.

On the other hand, the number of tourist arrivals, their expenditure as well as the number of nights stayed all increased.

Meanwhile, inflation accelerated during the survey period under the impact of rising energy and transport costs.

Year-on-year inflation rates, computed on the basis of the Retail Prices Index and the Harmonised Index of Consumer Prices, rose to 3.6 per cent and 3.4 per cent respectively in December. However, going into this year, inflation eased on both measures.

The Review, which analyses economic and financial developments both in Malta and abroad, observed that the Bank maintained an unchanged monetary policy stance throughout the final quarter of last year and during the first quarter of this year.

With the Bank's central intervention rate remaining unchanged at 3.25 per cent, changes in domestic money market interest rates were minimal during the fourth quarter of last year.

They fell slightly during the first two months of this year. Meanwhile, in the euro area short-term interest rates rose, with the corresponding premium on the Maltese lira narrowing between September and December, before falling further in February.

The lira remained at its ERM II central parity rate of MTL/EUR0.4293 throughout the survey period. In the equity market, the MSE share index rose in the fourth quarter, gaining 26.5 per cent over the previous quarter.

Turning to monetary developments, the Review notes that broad money expanded further throughout the quarter under review, driven by growth in domestic credit, primarily by lending to households.

Even though the net foreign assets of the banking system increased rapidly, this mainly reflected an injection of share capital into foreign-owned banks, which had no direct effect on monetary growth.

This notwithstanding, the Central Bank of Malta's net foreign assets continued to increase in the last quarter of the year before following a downward trend in the early part of this year.

On the labour front, data obtained from the Labour Force Survey showed that the labour force expanded during the fourth quarter of last year as compared to the same period in 2004. The unemployment rate also increased to 7.3 per cent at the end of the period.

In contrast, data on the registered unemployed for November showed a small fall in the labour supply on a year earlier, an increase in the gainfully occupied population and a reduction in the unemployment rate to 4.9 per cent.

Turning to the balance of payments, the Review notes that the current account deficit widened during the fourth quarter of last year, reflecting both a larger merchandise trade gap and increased net outflows on the investment income account.

These outweighed an increase in net receipts from transfers and a small rise in the surplus on the services account. After excluding movements in official reserves, the balance on the capital and financial account swung into surplus.

The Review then highlights the Maltese lira's movements against major currencies.

During the December quarter, the lira continued to move in tandem with the euro while depreciating against the US dollar. In terms of the pound sterling and the Japanese yen it strengthened. In the first two months of this year, however, the lira reversed its course against the dollar and lost ground versus sterling and the yen.

Commenting on fiscal developments, the Review reports that during the fourth quarter of last year the surplus recorded on the Consolidated Fund was smaller than in the same period of the previous year as expenditure rose more rapidly than revenue.

During last year as a whole, however, the general government deficit fell from 5.1 per cent of GDP to 3.3 per cent of GDP. Gross general government debt outstanding fell by 1.5 percentage points to 74.7 per cent of GDP at the end of last year.

This issue of the Quarterly Review is available on the website of the Central Bank of Malta at www.centralbankmalta.com