Quarterly Review

Central Bank of Malta Quarterly Review March 2002 Vol. 35 No.1 The Quarterly Review is prepared and issued by the Economics Division of the Central Bank of Malta. Opinions expressed do not necessarily reflect the official views of the Bank. Articles appearing in this issue may be reprinted in whole or in part provided the source is quoted. For copies of the Quarterly Review apply to:- The Manager External Relations Office Central Bank of Malta Castille Place Valletta CMR 01 Malta Telephone: (356) 21 247 480 Facsimile: (356) 21 243 051 Internet: www.centralbankmalta.com e-mail: [email protected] ISSN 0008-9273 Printed by Interprint Limited CONTENTS ECONOMIC SURVEY 1. Foreword 5 2. The International Environment 7 3. The Domestic Economy 11 Box 1: Business Perceptions Survey 19 4. The Balance of Payments and the Maltese Lira 22 5. Government Finance 27 6. Monetary and Financial Developments 31 7. The Banking System 38 Box 2: International Banking Institutions 42 NEWS NOTES 45 FINANCIAL POLICY CALENDAR 47 STATISTICAL TABLES 59 Notes: The cut-off date for information published in the Economic Survey is April 23, 2002. For figures published in the Statistical Tables, the cut-off date is April 23, 2002. Figures in Tables may not add up due to rounding. ECONOMIC SURVEY subdued. This was confirmed by data published in 1. FOREWORD March, which showed that Gross Domestic Product contracted by 2.9% in real terms during the final quarter of 2001, as the export During the final quarter of 2001 the Central Bank performance of the electronics sector deteriorated continued to ease its monetary policy stance. In and activity in the tourism industry declined. October the reduction in the required reserve ratio Private consumption fell during the quarter, as by one percentage point to 4% of the banks’ household disposable income expanded at a deposit liabilities, which had been announced in slower pace. Meanwhile, lower investment September, entered into effect. This was followed spending and a smaller build-up in inventories, in November by a cut in both the central which curtailed aggregate demand, were mainly intervention rate and the discount rate by 25 basis reflected in a drop in imports. points to 4.25%. The Bank lowered official interest rates again in January, cutting them by A similar pattern characterised economic another 25 points to 4%. These decisions were developments in the year as a whole. The weak based on the Bank’s analysis of economic and performance of the domestic economy, which had financial developments in Malta and abroad and already led the Bank to revise its growth forecasts were consonant with the Bank’s monetary policy for 2001 downwards, was reflected in the official strategy, which is based on pegging the Maltese data, which pointed to a 1% drop in GDP during lira to a basket of major currencies. the year. The data, which were released in March, showed that exports fell sharply and private Global economic conditions continued to consumption expanded only slightly in real terms. deteriorate during the final quarter of 2001, with Although imports fell faster than exports, this growth forecasts for the industrialised economies mainly reflected a drop in investment in machinery being revised downwards, and they remained generally weak going into 2002. In response, and a reduction in inventories. official interest rates in the major industrialised economies were reduced on a number of Respondents to the Bank’s latest business occasions during the December quarter. As a perceptions survey, which was conducted result, the premium on the Maltese lira widened, between January and February 2002, reported reaching a peak in November and, despite a below-normal activity levels during the final gradual narrowing thereafter, remained relatively quarter, although the outcome was better than high. This probably contributed to the increase in had originally been expected. The international the official external reserves observed during the economic slowdown continued to hit export- final quarter of 2001 and into the new year, which oriented manufacturers and the tourism industry. in turn supported the Bank’s decision to ease In general, locally-oriented firms also reported monetary policy. subdued sales, leading to a number of job losses. In fact, the claimant unemployment rate edged up An easier monetary policy stance was also to 5.1% in December, while the gainfully occupied appropriate in the light of the information population declined. Monetary developments available on the domestic economy, which also pointed to a slowdown in economic activity, suggested that the rate of economic growth had as the annual rate of growth of bank claims on the slowed down and that domestic demand remained private and parastatal sectors remained low. Central Bank of Malta, Quarterly Review, March 2002 5 Although the current account of the balance of policy strategy. payments swung back into deficit during the final quarter of 2001, in line with the normal seasonal Despite the slowdown in economic activity, pattern, the shortfall was less than half that inflation accelerated further during the final registered during the corresponding quarter a year quarter of 2001. The twelve-month moving earlier. The narrowing of the current account average measure rose to 2.9% in December, while deficit mainly reflected developments in the the year-on-year inflation rate went up to 4.6%. investment income account, but a smaller Inflation gained pace, in spite of a drop in food merchandise trade gap and increased net receipts prices, as a result of higher prices of fuel, from services also contributed. Net inflows on the beverages and clothing and footwear. capital and financial account also rose. These Nevertheless, underlying inflationary pressures balance of payments developments were reflected abated. in a steady increase in the Central Bank’s net foreign assets, which expanded by more than The Central Bank’s projections, which were Lm70 million during the quarter. Moreover, the published in its latest Annual Report, point to a trend expansion in the Bank’s external reserves in recovery in 2002, with real GDP growth forecast evidence since July 2001 continued into the first between 2.5% and 3%. The recovery is expected quarter of 2002. to occur in the second half of the year, however, as economic growth in the major industrialised At the same time, there were indications that the countries picks up, stimulating demand for fiscal stance was less expansionary than it had exports. Investment is expected to bounce been in the previous three quarters. In fact, the back following a sharp fall in 2001, while public Government deficit narrowed during the December and private consumption should continue to quarter, although Government spending grow. Unemployment is expected to edge contributed to real GDP during the period. The up further, while inflation is projected to Government’s continued commitment to fiscal drop to between 2.3% and 2.8% by the end of consolidation complements the Bank’s monetary the year. 6 Central Bank of Malta, Quarterly Review, March 2002 Economic and Monetary Developments in the 2. THE INTERNATIONAL Major Economies ENVIRONMENT During the December quarter of 2001, the United States economy registered the strongest quarterly growth rate of the year, with GDP expanding by The World Economy 1.7%, as against the 1.1% contraction of the The events of September 11 inflicted a previous quarter. This reflected higher consumer severe shock on the global economy, increasing purchases and the biggest increase in government risks and uncertainties at a time when the spending since 1978. Meanwhile, productivity world was already heading towards recession. held up well, with output per hour in the non-farm The prompt macroeconomic policy response sector rising at an annual rate of 5.2%, up by two from several countries, however, created percentage points from a year earlier. the premise for a strong and rapid recovery, Unemployment, however, rose to 5.6%, with both particularly in the United States itself and, service and manufacturing industries continuing to a lesser extent, in Europe. There were no to shed jobs. signs of an end to Japan’s economic woes, however. Against this background, the IMF In order to help the economy ward off recession, revised its estimate of world growth in 2002 the Federal Reserve lowered interest rates three downwards to 2.8%, from a previous estimate times during the quarter: on October 2, on of 3.5%. November 6 and again on December 11. These Table 2.1 INTERNATIONAL ECONOMIC INDICATORS Inflation Current account Real GDP (Consumer prices) balance % change % change US$ billions 1999 200020011 1999 2000 20011 1999 2000 20011 United States 4.1 4.1 1.0 2.2 3.4 2.9 -324.4 -444.7 -392.0 European Union 2.6 3.4 1.7 1.4 2.3 2.7 6.6 -28.0 0.9 Euro area 2.6 3.4 1.5 1.1 2.4 2.7 26.1 -8.7 14.2 United Kingdom 2.1 2.9 2.3 2.3 3 2.1 3 2.3 3 -30.9 -27.9 -24.3 Japan 0.7 2.2 -0.4 -0.3 -0.8 -0.7 106.8 116.9 90.8 Advanced countries 3.3 3.9 1.1 1.4 2.3 2.3 -139.5 -253.7 -199.6 Developing countries 3.9 5.8 4.0 6.8 5.9 6.0 -11.6 61.5 4.6 Countries in transition2 3.6 6.3 4.9 43.9 20.1 16.0 -2.1 27.0 13.2 1 Forecasts 2 Includes countries of Central and Eastern Europe and the former USSR. 3 Retail price index excluding mortgage interest.

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