The economy is expected to grow by 2 - 2.6 per cent in real terms, an increase of 0.3 percentage points over the previous projection, the Central Bank of Malta said in its revised projections for 2006.
The Central Bank was commenting in the third issue of its Quarterly Review for 2006, which analyses economic and financial developments both in Malta and abroad during the second quarter of 2006.
The projected increased in the anticipated economic growth reflects an upward revision in domestic demand growth and a higher estimate of inventory accumulation, which are partly offset by a reduction in projected exports, the Bank said.
Compared to a previous projection, the forecast for both private and government consumption expenditure has been raised.
Meanwhile, increased inventory levels and investment are expected to contribute to faster import growth. The Bank's inflation projection is revised marginally upwards on account of further increases in the international price of oil during the summer, the Central Bank said.
The Review observes that after raising the central intervention rate by 25 basis points to 3.50 per cent in May, the Bank considered its monetary policy stance to be appropriate to support the fixed exchange rate in ERM II.
The Bank's external reserves expanded during period under review, mainly boosted by receipts of privatisation proceeds.
However, the tightening stance of monetary policy abroad in the late summer months led to a narrowing of the short-term interest rate differential in favour of the lira. In the light of these developments and expectations of a further increase in official euro interest rates, the Bank reappraised its monetary policy stance and raised the central intervention rate by 25 basis points to 3.75 per cent at the end of October.
In its assessment of monetary developments, the Review notes that the annual growth rate of broad money slowed down to 3.6 per cent in June from 4.3 per cent three months earlier, with both narrow money and intermediate money aggregates decelerating. Domestic credit contracted in the second quarter of 2006, as a sizeable drop in net claims on the central government was only partly offset by a rise in private sector credit.
Meanwhile, in the financial market, short-term interest rates continued to rise in the second quarter, in line with official rates. Over the same period the Malta Stock Exchange share index fell sharply.
Turning to the performance of the economy, the Review observes that in the June quarter growth was slightly slower than in the preceding quarter. Second-quarter real GDP rose by 2.2 per cent on a year-on-year basis, as against 3.1 per cent in the March quarter.
Growth was mainly generated by a build-up in inventories and higher consumption expenditure. In contrast, both net exports and investment were lower. The manufacturing sector continued to expand in the June quarter, mainly as a result of higher exports of electronics, pharmaceuticals and food. In the tourism sector, although the number of visitors declined, both the length of stay and expenditure increased.
Inflation accelerated in the second quarter, primarily reflecting higher energy prices.
The 12-month moving average inflation rate edged up to 2.9 per cent in June from 2.6 per cent in March. Similarly, the 12-month moving average RPI rate rose to 3.1 per cent in June from 2.9 per cent three months earlier.
In the labour market, employment rose in the second quarter, while the unemployment rate fell marginally to 7.7 per cent. Administrative records compiled by the Employment and Training Corporation also showed a drop in the number of registered unemployed in the period under review so that the unemployment rate stood at 4.8 per cent at the end of June.
The Bank's latest Business Perceptions Survey, carried out between July and August 2006, showed a small improvement in firms' expectations about the general economic situation in the following six months. This was mainly driven by better sentiment among export-oriented firms. In terms of their own performance, most respondents were anticipating a pick-up in order books and activity levels in the fourth quarter.
The Review then focuses on the balance of payments and observes that the deficit on the current account widened during the second quarter of 2006, reflecting both a larger merchandise trade gap and a smaller surplus on the services account. These were partly offset by swings in the income and current transfers accounts, which both shifted into surplus. After excluding movements in official reserves, net inflows on the capital and financial account were substantially higher than in the corresponding period of 2005.
With regard to exchange rate developments, the Review notes that throughout the second quarter, the lira remained stable in ERM II at the central parity rate of MTL/EUR 0.4293. Moving in tandem with the euro, the lira continued to appreciate against the US dollar and the Japanese yen, while it weakened vis-à-vis the sterling. Going into the third quarter, the lira extended its upward trend against the US dollar and the yen, while it lost further ground against sterling.
Commenting on fiscal developments, the Review reports that in the June quarter the deficit on the Consolidated Fund was lower than in the same period of 2005 as growth in revenue outpaced that in expenditure, mainly because of a drop in capital spending.
In the first half of the year the deficit narrowed by Lm20.8 million on a year earlier to Lm74.0 million.
In an article assessing the stability of the domestic financial system during the first half of the year, the Review comments that the financial system remained strong and resilient.
In the short-term, financial stability risks are considered to be limited, with the banks having enough capital to withstand unanticipated shocks.
However, in the longer term, a persistence of certain trends in the banking sector may give rise to some credit and market risks, which may heighten the vulnerability of the financial sector.
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