The Central Bank of Malta has published the third issue of its Quarterly Review for 2022. This edition analyses in depth the economic and financial developments in Malta and abroad during the first quarter of 2022.
The pace of economic activity decelerated somewhat in the first quarter of the year, as real gross domestic product (GDP) rose by 7.6% on an annual basis, following an 11.8% increase in the previous quarter. This reflects a normalisation of growth rates, as the economy has recovered from the sharp decline in GDP that resulted from the COVID-19 pandemic.
Potential output growth stood at 4.5%, marginally up from 4.3% in the previous quarter. The Bank’s estimate of the output gap is positive and has widened, indicating that the economy is operating above its capacity. This reflects a strong recovery in activity within sectors such as tourism that were most affected by pandemic-related restrictions.
The Bank’s Business Conditions Index remained above its historical average estimated since 2000, but also shows signs of normalisation in the pace of economic expansion when compared with the high rates registered in the first half of 2021.
The European Commission’s Economic Sentiment Indicator edged up from the level recorded in the fourth quarter of 2021, and remained above its long-term average calculated since November 2002 and its pre-pandemic level. This may reflect the continued easing of COVID-19 restrictions, primarily those related to quarantine and the use of masks.
Developments in the labour market remained positive. Employment remained above pre-pandemic levels as activity rates rose further. Meanwhile, at 3.2% the unemployment rate stood unchanged from that registered in the previous quarter, and well below the 4.0% recorded a year earlier. Malta’s unemployment rate also remained below the average rate of 7.0% for the euro area.
Price pressures continued to build during the first quarter. Annual inflation, as measured by the Harmonised Index of Consumer Prices, stood at 4.5% in March, above that of 2.6% recorded in December. All components except energy registered faster growth in prices, although services inflation was the main driver behind the increase in inflation. Annual inflation based on the Retail Price Index – which only takes into account expenditure by Maltese residents – rose to 4.4% in March from 2.6% in December.
During the first quarter of 2022, the general government deficit widened when compared to that recorded in the corresponding period of 2021. When measured on a four-quarter moving sum basis, the general government balance registered a deficit of 8.0% of GDP, broadly unchanged from the 7.9% recorded in the fourth quarter of 2021. Meanwhile, the general government debt-to-GDP ratio rose to 57.6% from 56.4% at end-December 2021. Government’s net financial worth as a share of GDP improved slightly in the quarter under review.
The Review also presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). The Governing Council maintained an accommodative monetary policy stance during the first quarter of 2022. Key ECB policy rates remained unchanged at low levels.
In March, the Governing Council revised the purchase schedule for its Asset Purchase Programme (APP) for the coming months reducing the amounts to be purchased and bringing forward the expected end date of the net purchase phase. It also stated that if incoming data supported the expectation that the medium-term inflation outlook would not weaken after the end of its net asset purchases, the Governing Council would conclude net purchases under the APP in the third quarter of 2022. Meanwhile, as previously communicated, net purchases under the Pandemic Emergency Purchase Programme (PEPP) ended in March, although reinvestments of maturing securities under the programme are expected to continue until at least the end of 2024. In addition, the Council stated that any adjustment to the key ECB interest rates would take place after the end of net purchases under the APP and would be gradual.
In June 2022, the Governing Council decided to take further steps in normalising its monetary policy amid high inflation rates, namely, to end net asset purchases under the APP as of 1 July 2022 and to start raising key ECB interest rates in July.
Subsequently within the same month, the Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism. In addition, it agreed to accelerate the completion of the design of a new anti-fragmentation instrument.
On the basis of an updated assessment of inflation risks, on 21 July, the Governing Council decided to lift its key policy rates by 50 basis points. It also approved a new Transmission Protection Instrument.
Besides the standard economic analysis, the Review presents five studies. The first analyses merchandise trade flows between selected Middle Eastern and North African countries and Malta since 2011. Another study quantifies the sectoral and macroeconomic effects that the unprecedented fall in tourism had on the Maltese economy in 2020. A third study outlines the main climate-relevant fiscal measures introduced in Malta and assesses their impact on the fiscal balance. The Review also discusses the main findings of a fourth study which assesses the impact of migration assumptions on ageing costs. Finally, it describes the liquidity conditions in the Maltese banking system and the monetary policy operations conducted by the Bank between 27 January 2021 and 8 February 2022.
The third issue of the Quarterly Review for 2022 is available on the Bank’s website.
Source: Central Bank of Malta