The Central Bank of Malta has published the second issue of its Quarterly Review for 2011. This issue analyses economic and financial developments during the first quarter of 2011 and going into the second.

The Review commences with an analysis of the conduct of monetary policy within the euro area. The European Central Bank (ECB) left the interest rate on the Main Refinancing Operation (MRO) unchanged during the first quarter of 2011. However, it raised it by 25 basis points to 1.25% in April and again in July to 1.50%. Meanwhile, the ECB continued to implement non-standard monetary policy measures throughout the period reviewed.

In its analysis of international economic conditions, the Review notes that during the March quarter of 2011, economic growth accelerated in the euro area but moderated in the United States. The main emerging market economies continued to expand strongly. On the inflationary front the Review observes that upward pressures persisted in various major countries, mainly reflecting higher food and commodity prices.

Economic activity in the euro area accelerated during the March quarter, with real GDP rising by 2.5% on a year earlier, up from 1.9% in the previous quarter. Growth in the March quarter was driven primarily by domestic demand. Meanwhile, the annual HICP inflation rate in the euro area rose further, reaching 2.7% in March from 2.2% in December.

With regard to economic forecasts, the June 2011 Eurosystem staff macroeconomic projections for the euro area point to annual real GDP growth in a range of between 1.5% and 2.3% in 2011 and between 0.6% and 2.8% in 2012. According to these projections, the average annual rate of inflation is set to lie between 2.5% and 2.7% in 2011 and then to ease to between 1.1% and 2.3% in 2012.

Turning to developments in the Maltese economy, the Review notes that real GDP continued to expand in the first quarter, with output increasing by 2.3%. This was mainly driven by net exports and consumption. However, the contribution of domestic demand to GDP growth was negative due to a contraction in investment and inventories.

The performance of the labour market continued to improve with LFS and ETC data both pointing to further growth in employment levels during the first quarter. Additionally, the unemployment rate in seasonally adjusted terms fell to 6.2% in March, 0.3 percentage points below the December level. The March rate was the lowest since the last quarter of 2008.

Focusing on movements in the balance of payments during the first quarter of 2011, the Review observes that the deficit on the current account narrowed substantially when compared with the same quarter of 2010, mainly due to an improvement on the merchandise trade account. However, a larger surplus on services and lower net outward current transfers also contributed. As a share of GDP, the current account deficit declined to 3.6%, as against 5.4% in the year to March 2010.

As regards price developments, the Review points out that annual HICP inflation decreased in the first quarter of 2011, from an annual rate of 4.0% in December to 2.8% in March. The decline was mainly driven by slower price increases in the services sector. Energy prices remained the largest source of inflation even though the annual growth rate for this component dropped to 14.3% in March from 21.7% three months earlier.

During the first quarter of 2011, the Harmonised Competitiveness Index (HCI) in both nominal and real terms resumed an upward path. Similarly, on a four-quarter moving average basis, unit labour costs (ULC) increased over the previous quarter.

In its assessment of the fiscal situation, the Review notes that, in the first quarter, the general government deficit narrowed on a year-on-year basis. This was attributed to higher revenue, which grew by slightly more than expenditure. Meanwhile, it was estimated that the general government deficit, based on the four quarters to end-March, improved marginally, by 0.1 percentage points, on a year earlier, to 3.6% of GDP. The debt ratio continued to rise, reaching 69.7% of GDP in the first quarter of 2011.

The Review’s analysis of monetary trends shows that during the March quarter of 2011, the contribution of Maltese MFIs to the euro area broad money stock expanded further, though at a slower pace as growth in residents’ deposits slowed down. At the same time, credit to residents expanded less rapidly than in the previous quarter, while net claims on non-residents fell. While the weighted average interest rate charged by MFIs on loans to residents increased, the corresponding deposit rate declined. Additionally, domestic money market yields rose.

In focusing on the policy perspective the Review notes that the re-emergence of tensions in a number of sovereign debt markets in the euro area and the tightening monetary policy stance of the ECB have increased the urgency of addressing fiscal imbalances. Thus, the budgetary consolidation strategy should be pursued actively and should be supported by measures to enhance the economy’s resilience and competitiveness.

The second issue of the Quarterly Review for 2011 is available on the website of the Central Bank of Malta at www.centralbankmalta.org

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