The Central Bank of Malta has published the first issue of its Quarterly Review for 2022, which analyses in depth economic and financial developments in Malta and abroad during the third quarter of 2021.
In the third quarter of 2021, economic activity continued to be affected by the COVID-19 pandemic and associated containment measures, although these were less stringent than a year earlier. Growth remained robust, as real GDP rose by 9.7% when compared with the third quarter of 2020, and was primarily driven by the services sector. Notwithstanding the recent increase, the GDP level still stood 2.2% below that which prevailed in the third quarter of 2019.
Potential output growth stood at 2.7% in the third quarter of 2021, up from 2.5% in the previous quarter. The Bank’s estimate of the output gap narrowed but remained in negative territory. This means that despite the economy’s gradual return to more normal levels of economic activity, the economy’s productive capacity remain still remains somewhat underutilised, especially in tourism and entertainment-related sectors.
The Bank’s Business Conditions Index stood strongly above its historical level in the third quarter of 2021 as several sub-components of the index recorded strong annual increases over the third quarter of 2020, which was a low point for several indicators due to the COVID-19 pandemic.
Meanwhile, the European Commission’s Sentiment Indicator retreated slightly from the level recorded in the second quarter but remained elevated from a historical perspective. This may reflect the easing of the COVID-19 restrictions and related improvement in activity as well as a further increase in vaccination rates achieved during the quarter.
During the third quarter of 2021, developments in the labour market remained positive as employment stood above pre-pandemic levels and unemployment fell further. According to the Labour Force Survey, employment and activity rates increased. The unemployment rate stood at 3.6%, slightly higher than the 3.4% registered in the previous quarter, but well below the 4.9% recorded a year earlier. It also stood below the average rate for the euro area which stood at 7.4%.
Inflation increased during the quarter under review. Annual inflation as measured by the Harmonised Index of Consumer Prices stood at 0.7% in September, up from 0.2% in June, mainly due to faster growth in non-energy industrial goods and unprocessed food prices. Annual inflation based on the Retail Price Index – which only takes into account expenditure by Maltese residents – rose from 1.5% in June to 2.2% in September.
During the third quarter of 2021, the general government deficit widened when compared to a year earlier, as expenditure increased more strongly than revenue. When measured on a four-quarter moving sum basis, the general government deficit reached 8.5% of GDP, marginally above the 8.4% recorded in the second quarter. Meanwhile, the general government debt-to-GDP ratio closed the third quarter at 57.2%, down from 59.1% at the end of the previous quarter. Government’s net financial worth as a share of GDP improved 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). It recalls that the Governing Council maintained its accommodative monetary policy stance during the third quarter of 2021. In July, the Council also approved a new monetary policy strategy and revised its forward guidance on interest rates. More recently, in December it stated that the Eurosystem will discontinue net asset purchases under the pandemic emergency purchase programme (PEPP) at the end of March 2022. However, the PEPP reinvestment phase has been extended, until at least the end of 2024. Purchases under the asset purchase programme (APP) will continue and will end shortly before the ECB starts raising its key interest rates.
The Review presents a study which explores the effects that restrictive policies had on mobility across the European Union during the initial phases of the COVID-19 pandemic after controlling for individuals’ self-imposed changes in behaviour. The Review also carries an analysis of long-term trends in educational attainment in Malta. In addition, it presents estimates of the exchange rate pass-through to consumer prices in the Maltese economy since 2008.
The first issue of the Quarterly Review for 2022 is available on the Bank’s https://www.centralbankmalta.org/quarterly-review