The Central Bank of Malta has published the second issue of its Quarterly Review for 2023. This edition analyses in depth the economic and financial developments in Malta and abroad during the fourth quarter of 2022.
During this period, economic activity remained strong, but decelerated when compared to the previous quarter, as annual real gross domestic product (GDP) growth slowed to 4.7% from 5.3%. The moderation in growth was largely underpinned by a more negative contribution from net exports, which offset an increase in the contribution of domestic demand. When adjusting for imports, domestic demand remained the main driver of growth, but external trade had a positive contribution too.
Potential output growth is estimated to have stood at 6.3% in the fourth quarter of 2022, above the rate estimated for the previous quarter. The Bank’s estimate of the output gap remained positive but narrowed, indicating that the degree of over-utilisation of the economy’s productive capacity has eased somewhat.
The Bank’s Business Conditions Index has normalised from the record highs registered in the first half of 2021, and stood closer to its historical average.
The European Commission’s Economic Sentiment Indicator fell below its long-term average, and its level recorded in the third quarter of the year. Consequently, it stood below that in the euro area.
Developments in the labour market remained positive. Employment levels and employment rates both rose, in annual terms. Meanwhile, at 2.9%, the unemployment rate stood unchanged from that registered in the previous quarter, and below the rate of 3.0% recorded a year earlier. It also remained well below the average rate of 6.7% for the euro area.
Consumer price pressures eased somewhat during the quarter under review, but inflation remained high from a historical perspective. Annual inflation, as measured by the Harmonised Index of Consumer Prices, stood at 7.3% in December, marginally below that of 7.4% recorded in September. Lower services inflation was the main driver behind the marginal decrease in inflation since September. This offset an increase in food and non-energy industrial goods inflation. Annual inflation based on the Retail Price Index – which only captures expenditure by Maltese residents – edged down from 7.5% in September to 7.4% in December.
When measured on a four-quarter moving sum basis, the general government balance registered a deficit of 5.8% of GDP, up from 5.7% in the third quarter of 2022. Meanwhile, the general government debt-to-GDP ratio reached 53.4% at end December 2022, higher than the 52.9% recorded in September. Government’s net financial worth as a share of GDP also improved in the quarter under review, while remaining negative.
The Review also presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). The Governing Council raised its key interest rates further in October, and increased them again in December. The Governing Council stated that it anticipated further significant increases in interest rates given still very high inflation, and in fact additional increases were announced in the first months of 2023.
The hike in interest rates is being complemented with measures targeting credit operations and asset purchases. In December, the ECB announced that from March 2023, the Eurosystem will not reinvest all of the principal payments from maturing securities under the Asset Purchase Programme (APP).
During the quarter, the ECB also adjusted the interest rates applicable to the targeted long-term refinancing operations (TLTRO) III to ensure consistency with the monetary policy stance, and offered banks additional voluntary early repayment dates. It also set the remuneration of minimum reserves at the ECB’s deposit facility rate, thus aligning it more closely to money market conditions. The Governing Council also reiterated its intention to continue reinvesting the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP), until at least the end of 2024.
Besides the usual economic analysis, the Review presents the results of a study that assesses the impact of the COVID-19 pandemic on households’ finances, based on the latest wave of the Household Finance and Consumption Survey. Another study looks at whether the economic impact of the rising pension age in Malta needs to be reassessed in light of the pandemic. This issue also includes a study on the responsiveness of the Maltese economy to developments in global energy markets and the shipping industry. Finally, it presents an article on the evolution of the role of women in the labour market in Malta.