In its review of this year’s third quarter, the Central Bank of Malta forecasts the county’s real economic growth to accelerate moderately, but at a rate below its potential.
While growth is expected to be driven by higher exports and a rise in investment, private consumption expenditure is expected to drop following weaker-than-expected data on employment.
The CBM’s forecast for government consumption expenditure has been revised downwards, due to expected fiscal tightening, together with the decline in private consumption which will limit import growth.
However, the Bank expects the external deficit to rise on account of the sharp increase in oil prices.
The Bank’s inflation projection, meanwhile, has been revised downward as the increase in the standard VAT rate at the beginning of the year is likely to have a smaller impact on prices than had previously been anticipated.
Turing to monetary policy, the Review notes how the Bank continued to hold the central intervention rate steady at three per cent during the second and third quarters of 2004. The Bank’s net foreign assets declined during the second quarter and in July, but recovered strongly in August and into September. Although inflation rose during the second quarter and into the third, the Bank’s measure of core inflation remained broadly stable. Meanwhile the performance of the domestic economy was mixed and domestic demand appeared to be generally subdued.
Mainly reflecting developments in official interest rates, domestic short-term interest rates remained largely unchanged over the survey period. However, as money market interest rates abroad rose, the premium on Maltese lira short-term interest rates narrowed during the second quarter and into the third. Yields on longer-term domestic bonds declined slightly during the second quarter, but rose again later. In the equity market, the MSE share index registered a drop in the June quarter but this was followed by a strong recovery in July and August.
In its assessment of monetary developments, the Review notes that broad money expanded further during the three month period to June, although growth was dampened by portfolio shifts into Government bonds, as the Government launched a substantial amount of securities on the primary market. In line with recent trends, monetary growth was fuelled by a preference for liquid assets. Domestic credit expanded modestly during the second quarter, driven by a strong demand for house loans that offset subdued demand for bank lending from other sectors. The net foreign assets of the banking system also increased.
The Review then focuses on the economy’s performance during the first half of 2004. GDP figures for the second quarter showed that the relatively strong growth registered in the first quarter was not sustained. Nevertheless, over the six months to June, higher investment and lower net imports outweighed a reduction in private and public consumption, resulting in a modest real GDP growth rate of 0.3 per cent. In the manufacturing sector, the pick-up observed in the first quarter was followed by a slowdown during the second quarter, with a significant number of firms reporting reduced sales, investment and employment. At the same time, tourist expenditure dropped despite an increase in the number of tourists, reflecting a shorter average length of stay. A contraction was also reported in the number of cruise passenger arrivals.
Inflation rose during the second quarter, with the twelve-month moving average rate reaching two per cent in June, largely because of increases in the prices of transport & communications and clothing & footwear. In August, the rate rose further to 2.4 per cent.
Labour market data showed a more positive trend with the unemployment rate declining to 5.6 per cent in May 2004 from its 6.1 per cent peak in February. More recent figures show that the shrinkage in employment has been moderating, while in August the number of registered unemployed fell, year-on-year, for the first time since May 2003.
The Bank’s Business Perceptions Survey, conducted during the July/August period, showed that the balance of respondents expecting an improvement as against those expecting a deterioration in the economy’s performance turned negative during the second quarter, although the largest group continued to lie in the no-change category. Respondents were also pessimistic about employment prospects and were expecting continued weakness in the labour market.
Turning to the balance of payments, the Review highlights the smaller deficit in the current account in the second quarter of 2004, when compared to the same quarter of 2003. This was the result of a narrower merchandise trade gap, combined with increased surpluses on the income and services accounts. In contrast, the position on the capital and financial account deteriorated, with net outflows being recorded after excluding movements in international reserves.
The Review observes that during the second quarter, the Maltese lira remained stable against the euro, gained ground against the pound sterling and depreciated marginally against the US dollar. In the third quarter, the lira depreciated slightly against the euro while it rose against the dollar and the pound.
Commenting on fiscal developments, the Review reports that during the second quarter the deficit on the Government’s Consolidated Fund was lower than in the same period last year. This was mainly due to increased revenue, coupled with a small decline in expenditure. The primary balance in the Fund, which excludes interest payments from expenditure, also improved, indicating a less expansionary fiscal stance in 2004. Moreover, the release of further fiscal data covering the first eight months of the year show that the deficit contracted compared with the same period last year.
In the report analysing the financial stability situation it is observed that risks to financial stability decreased during the first half of 2004, as credit risk eased. However, although official rates were left unchanged, credit institutions reported downward pressure on their net interest income during the period. This notwithstanding, the banking system’s profitability and its capital adequacy ratio increased significantly, the latter reflecting a drop in risk-weighted assets coupled with a rise in the banks’ total own funds. Meanwhile, liquidity in the banking system remained high, boosted by a further rise in deposit liabilities.