QUARTERLY REVIEW 2014 Vol. 47 No. 2 © Central Bank of Malta, 2014 Address Pjazza Kastilja Valletta VLT 1060 Malta Telephone (+356) 2550 0000 Fax (+356) 2550 2500 Website http://www.centralbankmalta.org E-mail [email protected] Printed by Gutenberg Press Ltd Gudja Road Tarxien, Malta All rights reserved. Reproduction is permitted provided that the source is acknowledged. The cut-off date for statistical information published in the Economic Survey of this Review is 14 August 2014. Figures in tables may not add up due to rounding. ISSN 0008-9273 (print) ISSN 1811-1254 (online) CONTENTS FOREWORD 5 ECONOMIC SURVEY 8 1. International Economic Developments and the Euro Area Economy 8 International economic developments International financial markets Commodities Economic and monetary developments in the euro area 2. Output and Employment 20 GDP and industrial production Box 1: Tourism activity Box 2: Business and consumer surveys The labour market Box 3: Developments in Malta’s structural unemployment 3. Prices, Costs and Competitiveness 38 HICP inflation Box 4: Communicating uncertainty – a fan chart for HICP projections RPI inflation Box 5: Residential property prices Costs and competitiveness 4. The Balance of Payments 50 The current account The capital and financial account International investment position 5. Government Finance 55 General government Consolidated Fund General government debt Box 6: Estimating the cyclically adjusted budget balance 6. Monetary and Financial Developments 67 Monetary aggregates and their counterparts The money market The capital market NEWS NOTES 76 STATISTICAL TABLES 83 ABBREVIATIONS ECB European Central Bank EONIA Euro OverNight Index Average ESA 95 European System of Accounts 1995 ESCB European System of Central Banks ETC Employment and Training Corporation EU European Union EURIBOR Euro Interbank Offered Rate FTSE Financial Times Stock Exchange GDP gross domestic product HCI harmonised competitiveness indicator HICP Harmonised Index of Consumer Prices IBRD International Bank for Reconstruction and Development IMF International Monetary Fund LFS Labour Force Survey LTRO longer-term refinancing operation MIGA Multilateral Investment Guarantee Agency MFI monetary financial institution MFSA Malta Financial Services Authority MGS Malta Government Stocks MRO main refinancing operation MSE Malta Stock Exchange NACE statistical classification of economic activities in the European Community NCB national central bank NPISH Non-Profit Institutions Serving Households NSO National Statistics Office OECD Organisation for Economic Co-operation and Development OMFI other monetary financial institution OMT Outright Monetary Transaction RPI Retail Price Index ULC unit labour cost FOREWORD The Governing Council of the European Central Bank eased its monetary policy stance further during the first nine months of 2014 against a backdrop of a subdued outlook for inflation, weak growth momentum and restrained money and credit dynamics. In June the Council again lowered key interest rates, cutting the main refinancing operation (MRO) rate by 10 basis points to 0.15%. At the same time, the rates on the marginal lending facility and on the deposit facility were reduced to 0.40% and -0.10%, respectively, with the deposit rate mov- ing into negative territory for the first time. Meanwhile, the Governing Council introduced four-year targeted longer-term refinancing opera- tions (TLTRO). These four-year TLTROs are aimed at supporting bank lending to the euro area non-financial private sector, excluding loans to households for house purchase. At the same time, the Governing Council announced the prolongation of the fixed rate, full allotment tender proce- dures at least until December 2016. The Council also suspended the sterilising operations related to the Securities Markets Programme and announced that it would intensify preparations for out- right purchases of asset-backed securities. In September the Governing Council decided to lower key interest rates by a further 10 basis points. This brought the MRO rate down to 0.05%. In addition, the rates on the marginal lend- ing facility and the deposit facility were reduced to 0.30% and -0.20%, respectively. Moreover, the Governing Council decided to launch Eurosystem purchases of private sector assets. More specifically, the Eurosystem will buy a broad portfolio of asset-backed securities and euro-denom- inated covered bonds. The euro area economy continued to recover slowly during the first quarter of 2014. Real gross domestic product (GDP) rose by 0.2% quarter-on-quarter, following a 0.3% increase in the last quarter of 2013. Growth in the first quarter of 2014 was driven by domestic demand, particularly government spending and inventories. In contrast, the contribution of net exports to GDP growth turned negative during the first three months of 2014, as imports outpaced exports. According to Eurostat’s flash estimate, real GDP was stable on a quarter-on-quarter basis in the following quarter, underscoring the fragility of the recovery of the euro area economy. The annual rate of inflation in the euro area, based on the Harmonised Index of Consumer Prices (HICP), remained low. In March it dipped to 0.5% from 0.8% in December, mainly reflecting devel- opments in food and energy prices, though price pressures in the remaining HICP components were also moderate. Inflation remained subdued in the second quarter of the year, with the annual rate remaining at 0.5% in June. According to the Eurosystem’s macroeconomic projections published in June, euro area real GDP growth was expected to gradually recover over the forecast horizon. Real GDP was set to expand by 1.0% in 2014 before accelerating to 1.7% in 2015 and 1.8% in 2016. The annual HICP inflation rate was forecast to weaken to 0.7% in 2014, before rising to 1.1% in 2015 and 1.4% in 2016. Turning to local developments, GDP growth in Malta accelerated to 3.5% in annual terms, fol- lowing an expansion of 2.2% in the last three months of 2013. Growth in the first three months CENTRAL BANK OF MALTA Quarterly Review 2014:2 5 of the year was largely driven by domestic demand, particularly investment, although private and government consumption also supported the expansion. Net exports on the other hand contrib- uted only marginally to GDP growth. Economic activity remained strong in the second quarter, supported by both domestic demand and net exports, though the annual rate of GDP growth moderated to 2.9%. Consumer price inflation in Malta picked up further during the first quarter of 2014, but remained low. Annual HICP inflation rose to 1.4% in March from 1.0% in December, with the acceleration driven by developments in prices of services, energy and non-energy industrial goods. In con- trast, the annual rate of change of food prices moderated, largely under the impact of a decline in unprocessed food prices. Inflation subsequently slowed down to 0.7% in June, mainly reflecting the cut in electricity tariffs in April and weaker growth in food prices. The performance of the labour market remained strong during the first quarter of 2014, with con- tinued growth in employment. According to the Labour Force Survey (LFS), employment rose by 1.9% on a year earlier, following a 2.8% increase in the last quarter of 2013. Meanwhile, the number of full-timers registered with the Employment and Training Corporation rose at an annual rate of 3.6% in March. The unemployment rate based on the LFS was unchanged at 6.0% com- pared with a year earlier, but 0.4 percentage point lower than the rate recorded in the preceding three-month period. With regard to competitiveness indicators, between December and March the nominal and real harmonised competitive indicators (HCI) both rose, though they declined during the following quarter. In June the nominal HCI was still around 1.0% above its level a year earlier, but the real HCI was down by 0.3%. Thus, in the year to June the loss in price competitiveness arising from exchange rate movements was more than offset by a narrowing inflation differential against Malta’s trading partners. In the first quarter of 2014, the annual rate of increase in unit labour costs, measured as a four-quarter moving average, moderated to 1.0% from 1.5% in the last quarter of 2013. In the external sector, during the first quarter of 2014 the deficit on the current account of the bal- ance of payments declined markedly over the same period of 2013. This was largely on account of lower net outflows on the income account, although a higher surplus on services also contrib- uted. In contrast, the merchandise trade gap widened and net inward current transfers declined. When expressed as a four-quarter moving sum, the balance on the current account remained in surplus. In the year to March 2014, this surplus was equivalent to 1.6% of GDP, as against 0.4% in the 12 months to March 2013. Maltese residents’ deposits with resident credit institutions accelerated during the second quarter, with the annual growth rate rising to 11.7% in June, driven by overnight deposits and deposits with an agreed maturity of up to two years. Meanwhile, credit granted to residents also increased at a faster pace, with the annual rate of change rising from 0.9% in March to 3.3% three months later. This reflected faster growth in credit granted to general government and other residents. The broad downward trend in euro area interest rates influenced domestic financial markets dur- ing the second quarter of the year. Yields on three-month Treasury bills fell, with the secondary market rate standing at 0.29% by end-June, down from 0.37% at the end of March. Similarly, the yield on five-year government bonds fell to 1.48%, while that on ten-year government bonds CENTRAL BANK OF MALTA Quarterly Review 2014:2 6 declined to 2.76%, from 2.00% and 2.98%, respectively, three months earlier.