The Central Bank of Malta has published the third issue of its Quarterly Review for 2020. This edition analyses economic and financial developments in Malta and abroad during the first quarter of 2020. The information presented, therefore, reflects the initial impact of COVID-19 and the related containment measures on the economy.
The Review notes that the pace of economic activity decelerated sharply in the first quarter of 2020 on the back of the impact of the COVID-19 pandemic, with real gross domestic product (GDP) rising by just 0.5% in annual terms, following a 4.8% increase in the fourth quarter of 2019. The slowdown in growth was largely underpinned by a sharp contraction in domestic demand. The contribution of net exports also declined, but remained positive. Annual growth in Malta during the first quarter of the year compares favourably with that in the euro area, as euro area real GDP contracted by 3.0% during the same period.
Potential output growth moderated to 3.3%, from 5.0% in the previous quarter. The output surplus, measured as a four-quarter moving average, narrowed compared with the last quarter of 2019.
The Bank’s Business Conditions Index decreased sharply during the first quarter of 2020, primarily reflecting the economic impact of COVID-19. The fall in the index suggests that economic conditions have shifted significantly below their long-term average.
The labour market showed a signficant degree of resilience, given the scale of the economic shock caused by the pandemic, though this partly also reflected expectations of fiscal support measures. Employment continued to increase and the unemployment rate remained low from a historical perspective. According to the Labour Force Survey, the unemployment rate stood at 3.3%, lower than that recorded a year earlier and well below the average rate for the euro area – which stood at 7.5% – though marginally up from 3.2% in the last quarter of 2019. However, labour market data for the first quarter of the year may not yet fully reflect the impact of COVID-19 as the major containment measures only became effective in the second half of March. Furthermore, supplementary information suggests that the effects of the pandemic were mostly reflected in hours worked, rather than in headcount reductions.
Annual inflation as measured by the Harmonised Index of Consumer Prices moderated to 1.2% in March, from 1.3% in December 2019, largely driven by slower growth in the prices of services and falling prices of non-energy industrial goods. Annual inflation based on the Retail Price Index, which only takes into account expenditure of Maltese residents, eased to 1.1%.
With regard to public finances, the general government deficit widened significantly when compared with the corresponding period a year earlier, as revenue fell and expenditure rose. The deterioration in public finances largely reflects the negative impact of the COVID-19 pandemic, in particular, weaker activity and postponement of tax payments was reflected in lower tax revenue, while fiscal support measures lifted a number of government expenditure items. When measured on a four-quarter moving sum basis, the general government registered a deficit of 1.7% of GDP. Meanwhile, the general government debt-to-GDP ratio increased to 44.4% during the first quarter of 2020, from 42.9% at end-December. Net financial worth as a share of GDP worsened, as an increase in the stock of financial assets held by government was offset by a larger rise in financial liabilities.
The Review presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the first quarter of 2020, the Council maintained its highly accommodative monetary policy stance. However, the ECB also announced a package of additional monetary policy measures to combat the economic disruption and heightened uncertainty brought about by the pandemic. Further measures were announced in the second quarter of the year.
These measures along with unprecedented action by supervisors and fiscal authorities should help sustain a steady flow of credit to the private sector and support the return of economies to a recovery path. In fact, incoming information shows the start of a recovery globally and in the euro area, albeit from lower levels. However, the outlook remains uncertain and conditional on the evolution of the pandemic and the development of a medical solution.
The Review summarises the main results of a study on the impact of pension age increases on the labour market behaviour of males and females of specific birth cohorts. It also presents an analysis of the key differences between the symmetric input-output tables (SIOT) for Malta present in the World Input Output Database (WIOD) and those published by the National Statistics Office. Finally, it also features the results of a study on the size of the Maltese shadow economy.
The third issue of the Quarterly Review for 2020 is available on the Bank’s website.