The Central Bank of Malta has published the third issue of its Quarterly Review for 2021, which analyses economic and financial developments in Malta and abroad during the first quarter of 2021. The information presented coincides with the rise of active COVID-19 cases and the re-introduction of containment measures in March. This included the shutdown of most shops and catering establishments, as well as school closures.
In the first quarter of 2021, economic activity continued to show signs of improvement despite being subjected to renewed pandemic-related measures. Real GDP fell by 1.8% in annual terms – a more muted decline than that experienced in the previous quarter, when GDP had contracted by an annual 7.8%. The economic contraction was underpinned by a sharp fall in net exports, as the contribution of domestic demand was positive. Sector data show that the contraction in activity was primarily driven by the services sector, reflecting the fact that tourism-related activities remained relatively depressed, as well as the shutdown of non-essential services in March 2021. Activity also decreased in the manufacturing and construction sectors, although the dampening effect on overall GDP was relatively minimal.
Potential output growth picked up in the first quarter of 2021, standing at 1.9% from ‑0.3% in the previous quarter – mainly due to an improvement in the contribution of total factor productivity, which had turned negative in 2020. The Bank’s estimate of the output gap remained firmly in negative territory, as demand remained short of the economy’s potential.
The Bank’s Business Conditions Index showed that business activity started to improve on a year-on-year basis in the first quarter of 2021, though economic activity levels remained below those prevailing before the pandemic. The European Commission’s Economic Sentiment Indicator continued to recover from the trough recorded in 2020 as a result of the pandemic but remained low from a historical perspective as COVID-19 continued to weigh on consumer and business confidence throughout the quarter.
During the first quarter of 2021, the labour market continued to recover, as employment increased in quarter-on-quarter terms, while unemployment decreased. However, according to the Labour Force Survey, employment levels remained below those that prevailed pre-pandemic. The unemployment rate stood at 3.9%, lower than the 4.4% registered in the previous quarter, but higher than the 3.6% recorded a year earlier. Nonetheless, the unemployment rate remained low from a historical perspective and well below that in the euro area, which stood at 8.5%.
Inflation remained low. Annual inflation as measured by the Harmonised Index of Consumer Prices eased to 0.1% in March, from 0.2% in December, driven by slower growth in the prices of services and processed food. Annual inflation based on the Retail Price Index – which only takes into account expenditure by Maltese residents – stood at 0.4%, up from 0.2% in December.
During the first quarter of 2021, general government finances continued to be negatively impacted by COVID-19. The general government deficit was significantly wider than that recorded in the corresponding period a year earlier. When measured on a 4-quarter moving sum basis, the general government balance registered a deficit of 10.6% of GDP, against a deficit of 10.2% in the fourth quarter of 2020. The general government debt-to-GDP ratio increased to 59.0% from 54.8% as at end-December 2020. Although the stock of financial assets held by the Government increased during the period under review, this was offset by a larger increase in financial liabilities. Consequently, the net financial worth as a share of GDP worsened.
The Review also presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank. The Governing Council reinforced its accommodative monetary policy stance during the first quarter of 2021. It confirmed that the Eurosystem will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850.0 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. At the same time, it also said that on the basis of a joint assessment of financial conditions and the inflation outlook, PEPP purchases during the second quarter of the year were expected at a significantly stronger pace compared to the first months of the year.
Meanwhile, the Governing Council reaffirmed its previous commitments on interest rates and asset purchases under the Asset Purchase Programme.
The Review also carries an analysis of the role of renewable electricity supply in Malta. Furthermore, it summarises the results of a study that uses the Household Budgetary Survey to explore the full saving rate distribution of Maltese households and maps the probability of saving over a range of household characteristics. In addition, it estimates an inflation rate for low-income households and assesses the implications of the real value of social benefits granted to these households.
The latest issue of the Quarterly Review for 2021 is available on the Bank’s website.