The Central Bank of Malta has published the first issue of its Quarterly Review for 2021. This edition analyses economic and financial developments in Malta and abroad during the third quarter of 2020. Hence, the information presented reflects the partial easing of restrictive measures related to COVID-19 at that time.
During the third quarter of 2020 economic activity recovered somewhat as GDP expanded in quarter-on-quarter terms. In particular, seasonally-adjusted data show that GDP rose by 7.4% during the third quarter, after contracting during the first two quarters of the year. This profile reflects a rebound in private consumption which was up by over a fifth over its second quarter trough.
Although the Review notes that economic activity levels improved during the quarter under review, they nevertheless remained well below pre-pandemic levels. Real GDP fell by 9.9% in annual terms in the third quarter of 2020, which is a more muted decline than that experienced in the second quarter – when GDP had contracted by 16.1%. The fall in GDP was largely underpinned by a sharp drop in net exports, as the deterioration in domestic demand was smaller. Nominal data on gross value added show that the contraction was primarily driven by the services sector.
Meanwhile potential output growth was at its lowest since 2003, it still remained positive during the third quarter of 2020, at 1.9%. This reflected the continued strength of the labour input, with very little increase in unemployment. The continued divergence between potential growth and developments in the GDP meant that when measured as a four-quarter moving average, the output gap was estimated at -7.2% in the third quarter of 2020, a further widening from the -4.2% estimated in the previous quarter.
The Bank’s Business Conditions Index improved marginally during the quarter under review, but remained firmly below its long-term average. The European Commission’s Economic Sentiment Indicator also remained low from a historical perspective.
While labour market conditions continued to be negatively affected by the pandemic, according to the Labour Force Survey, both the labour force and employment continued to rise on an annual basis during the third quarter. However, they rose at a slower rate than in the second quarter, resulting in a rise in unemployment. The unemployment rate stood at 4.6%, slightly higher than the 4.4% registered in the second quarter, and 3.7% recorded a year earlier. Nonetheless, the jobless rate in Malta remained well below the euro area average rate of 8.4% and relatively low historically in light of the very sharp contraction in activity. This reflects the highly supportive government measures and shorter working-time arrangements which mitigate the impact of COVID-19 containment measures on unemployment.
Inflation eased during the third quarter. Annual inflation as measured by the Harmonised Index of Consumer Prices decelerated to 0.5% in September from 1.0% in June, driven by slower growth in food prices and falling prices for energy and non-energy industrial goods. Inflation based on the Retail Price Index, which only takes into account purchases made by Maltese households, edged down to 0.2% in September.
With regard to public finances, the impact of the pandemic on government revenue and the fiscal support measures led to a widening of the general government balance during the quarter under review. When measured on a four-quarter moving sum basis, the general government balance registered a deficit of 8.0% of GDP in the third quarter of 2020, against a deficit of 5.1% in the previous quarter. The general government debt-to-GDP ratio rose to 53.7% from 51.0% at end-June. While the stock of financial assets held by government decreased marginally, the stock of financial liabilities increased, causing a deterioration in net financial worth as a share of GDP. Notwithstanding this development, the net financial worth of the Maltese general government continued to compare favourably with the euro area average.
The Review alsopresents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank. During the third quarter of 2020, the Council reinforced its accommodative monetary policy stance. It also reiterated that it will continue its purchases under the Pandemic Emergency Purchase Programme (PEPP), and that it will also continue to provide ample liquidity through its refinancing operations.
In the fourth quarter, the Governing Council increased the envelope of the PEPP by €500 billion to €1,850 billion. It also decided to recalibrate the parameters of the targeted long-term refinancing operations, to carry out three additional operations in 2021 and to offer four additional pandemic emergency longer-term refinancing operations in 2021.
The Review summarises the main results of a study which assesses the long-term housing rental market using online advertised listings with leading real estate agents. It also analyses Malta’s utilisation of its teleworking potential in recent years and compares it with that in the European Union. Furthermore, it provides an overview of the 2020 benchmark revision of the national accounts and its impact on the main aggregates of national accounts. The revision also introduced a number of new macroeconomic indicators, which the Bank will start to review in its forthcoming economic publications.
The first issue of the Quarterly Review for 2021 is available on the Bank’s website.