Growth maintains pace - CBM
In the light of Malta's entry into the euro area at the beginning of this year, the Central Bank of Malta's quarterly review which has just been published, takes on a new format. It includes a separate analysis of the euro area economy while the...
In the light of Malta's entry into the euro area at the beginning of this year, the Central Bank of Malta's quarterly review which has just been published, takes on a new format. It includes a separate analysis of the euro area economy while the chapters previously covering the Maltese economy are amalgamated into one chapter. A new section is introduced in this chapter focusing on indicators of competitiveness.
With the monetary policy of the European Central Bank (ECB) applying to Malta as well following the adoption of the euro, the review comments on the stance decided upon by the ECB's governing council during the first half of this year. It notes that this remained unchanged throughout the period, with the main policy rate, the minimum bid rate on its main refinancing operations, staying at the 4 per cent level. At the beginning of the year, the governing council confirmed upside risks to price stability in the medium term, but also noted the uncertainty about the impact of the ongoing reappraisal of risks in financial markets on the real economy. As the year progressed, the council noted that risks to price stability increased further and inflation was expected to remain high. Thus, to prevent broadly based second-round effects and to counteract risks to price stability, in July the ECB tightened its monetary policy stance, raising the minimum bid rate by 25 basis points to 4.25 per cent.
The Review comments on euro area economic developments during the first quarter of the year. It observes that GDP grew at a sustained annual rate, mainly driven by domestic demand, though the contribution of net exports was also significant. At the same time, however, mounting price pressures persisted, with inflation rising to new highs. In the labour market conditions remained favourable, even though employment expanded at a slightly slower pace.
With regard to the Maltese economy, the review notes that growth maintained a steady pace during the first three months of the year, with GDP expanding by 3.5 per cent on a year earlier spurred by buoyant domestic demand, particularly consumption and inventory accumulation. On the other hand, net exports contributed negatively to growth, as exports fell at a faster pace than imports. The bank's latest projections, however, point to a slowdown in GDP growth as a result of an expected weakening of domestic demand.
On inflation, the review observes that, as in the rest of the euro area, inflation in Malta accelerated further, with the annual percentage change in the harmonised index of consumer prices rising from 3.1 per cent in December last year to 4.3 per cent in March this year. The persistent rise in the prices of food items was the main factor behind this increase. Meanwhile, in the labour market, conditions remained buoyant with employment growth remaining strong and unemployment falling.
The review notes that the bank's survey on the perceptions of business operators in the service and construction industries revealed a pick-up in second quarter performance, with almost half of respondents quoting higher turnover than in the first quarter. Cost pressures, however, increased during the second quarter and were reflected in higher selling prices.
On competitiveness the review highlights recent developments in key indicators, namely unit labour costs and the harmonised competitiveness indicator compiled by the ECB.
On the basis of these indicators, Malta's overall international competitiveness appeared to have deteriorated moderately over the year up to March this year, despite an improved standing against the rest of the euro area.
Turning to developments in the balance of payments, the review observes that during the first quarter the current account deficit narrowed compared with a year earlier. This was spurred by lower net investment income outflows and higher net inward transfers that offset a wider merchandise trade gap. Meanwhile, net outflows were recorded on the capital and financial account.
During the March quarter the general government deficit widened on a year earlier as expenditure grew at a faster pace than revenue. Similarly, when compared to the corresponding period of last year, the deficit on the consolidated fund also increased during the first five months of year.
In its assessment of monetary developments, the review explains that entry into the euro area brought about significant changes in the method of compilation of Malta's monetary aggregates and the way these are analysed. In particular, it is no longer possible to compile accurately data on currency in circulation, which is a key component of the monetary aggregates. Residents' deposits grew strongly in the March quarter, mainly supported by a rise in deposits with an agreed maturity of up to two years. Meanwhile, credit to Maltese residents continued to expand, albeit at a slower pace, spurred by a rise in credit to other residents, which outweighed a fall in credit to general government.
The second issue of the Quarterly Review for 2008 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.
With the monetary policy of the European Central Bank (ECB) applying to Malta as well following the adoption of the euro, the review comments on the stance decided upon by the ECB's governing council during the first half of this year. It notes that this remained unchanged throughout the period, with the main policy rate, the minimum bid rate on its main refinancing operations, staying at the 4 per cent level. At the beginning of the year, the governing council confirmed upside risks to price stability in the medium term, but also noted the uncertainty about the impact of the ongoing reappraisal of risks in financial markets on the real economy. As the year progressed, the council noted that risks to price stability increased further and inflation was expected to remain high. Thus, to prevent broadly based second-round effects and to counteract risks to price stability, in July the ECB tightened its monetary policy stance, raising the minimum bid rate by 25 basis points to 4.25 per cent.
The Review comments on euro area economic developments during the first quarter of the year. It observes that GDP grew at a sustained annual rate, mainly driven by domestic demand, though the contribution of net exports was also significant. At the same time, however, mounting price pressures persisted, with inflation rising to new highs. In the labour market conditions remained favourable, even though employment expanded at a slightly slower pace.
With regard to the Maltese economy, the review notes that growth maintained a steady pace during the first three months of the year, with GDP expanding by 3.5 per cent on a year earlier spurred by buoyant domestic demand, particularly consumption and inventory accumulation. On the other hand, net exports contributed negatively to growth, as exports fell at a faster pace than imports. The bank's latest projections, however, point to a slowdown in GDP growth as a result of an expected weakening of domestic demand.
On inflation, the review observes that, as in the rest of the euro area, inflation in Malta accelerated further, with the annual percentage change in the harmonised index of consumer prices rising from 3.1 per cent in December last year to 4.3 per cent in March this year. The persistent rise in the prices of food items was the main factor behind this increase. Meanwhile, in the labour market, conditions remained buoyant with employment growth remaining strong and unemployment falling.
The review notes that the bank's survey on the perceptions of business operators in the service and construction industries revealed a pick-up in second quarter performance, with almost half of respondents quoting higher turnover than in the first quarter. Cost pressures, however, increased during the second quarter and were reflected in higher selling prices.
On competitiveness the review highlights recent developments in key indicators, namely unit labour costs and the harmonised competitiveness indicator compiled by the ECB.
On the basis of these indicators, Malta's overall international competitiveness appeared to have deteriorated moderately over the year up to March this year, despite an improved standing against the rest of the euro area.
Turning to developments in the balance of payments, the review observes that during the first quarter the current account deficit narrowed compared with a year earlier. This was spurred by lower net investment income outflows and higher net inward transfers that offset a wider merchandise trade gap. Meanwhile, net outflows were recorded on the capital and financial account.
During the March quarter the general government deficit widened on a year earlier as expenditure grew at a faster pace than revenue. Similarly, when compared to the corresponding period of last year, the deficit on the consolidated fund also increased during the first five months of year.
In its assessment of monetary developments, the review explains that entry into the euro area brought about significant changes in the method of compilation of Malta's monetary aggregates and the way these are analysed. In particular, it is no longer possible to compile accurately data on currency in circulation, which is a key component of the monetary aggregates. Residents' deposits grew strongly in the March quarter, mainly supported by a rise in deposits with an agreed maturity of up to two years. Meanwhile, credit to Maltese residents continued to expand, albeit at a slower pace, spurred by a rise in credit to other residents, which outweighed a fall in credit to general government.
The second issue of the Quarterly Review for 2008 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.