The slowdown observed in the third quarter of 2008 continued into the last quarter of the year, the Central Bank said in its Quarterly Review.

It said that real gross domestic product declined by 1.2 percent, mainly as a result of a deceleration in private consumption and reductions in investment and government consumption.

Over the year as a whole, the economy expanded by 1.6 percent.

Growth in private consumption eased from a rate of around six percent in each of the previous two quarters to 1.6 percent in the quarter under review.

More detailed data showed that, in nominal terms, consumption expenditure on clothing and recreational activities declined over the quarter.

Similarly, external trade data for the last three months of 2008 showed a fall in imports of consumer goods, particularly durable goods and food and beverages.

In a break from the increases in the previous quarters, real government consumption fell by 2.9 percent year-on-year.

In nominal terms, it rose by 1.6 percent, a slower pace than that registered in earlier quarters, when the increase was mostly accounted for by wage awards to public sector employees.

Meanwhile, investment spending fell by over a third, as both private and public investment declined.

Reduced spending on construction projects reflected the slowdown in the real estate market, the latter corroborated by the decline in the number of permits for residential property development issued during the three-month period to December. Investment in machinery and transport equipment also declined, though this was partly the result of a base effect related to the purchase of aircraft in 2007.

Weaker foreign demand contributed to the sharp decline in real exports, though the drop was exacerbated by a 12.8 percent increase in export prices.

In fact, balance of payments data also showed a substantial drop in the value of exports of goods and a more moderate decline in that of exports of services in the fourth quarter of 2008.

Imports dropped at the same rate as exports, reflecting the base effect related to the purchase of aircraft referred to earlier, as well as the high import content of output, including exports.

The resulting increase in net exports contributed positively to GDP growth.

The review reported that the general government deficit widened to 4.7 percent of GDP in 2008, up from 2.2 percent in 2007. More than half of this rise was attributable to one-off expenditure items, notably the early retirement schemes for shipyard workers and additional subsidies to the energy sector. Revenue growth moderated.

It said that in the current unfavourable external environment it was important to keep domestic costs and prices in check. The fact that inflation in Malta remainsed above that of the euro area wasa source of concern which could be addressed, in part, by promoting more competitive product markets and increased labour market flexibility. Progress in these areas would allow the Maltese economy to benefit more from an eventual recovery.

In the case of fiscal policy, the review argued that room for manoeuvre was limited. Nonetheless, targeted measures that improved the economy’s productive capacity and its cost competitiveness could, to some extent, allow for a more active role of the public sector. It remained important, though, to simultaneously resume the fiscal consolidation process, especially given the growing impact that population ageing was likely to have on public finances.

The first issue of the Quarterly Review for 2009 is on the Central Bank of Malta website.

www.centralbankmalta.org