Central Bank says growth to rem

The Central Bank of Malta has just released its Annual Report for 2016. The Report reviews the bank's policies and operations during the year and includes detailed financial statements.

A press conference was called at the newly-reopened Phoenicia Hotel in Floriana to explain the bank’s report. The press conference was addressed by Dr Mario Vella, Governor, Alfred Mifsud, Deputy Governor and Alexander Demarco, Deputy Governor.

An opening statement by the Governor is followed by an analysis of economic and financial developments in Malta and abroad and a review of the bank’s operations.

The report also carries articles on sectoral financial linkages and house prices in Malta. It also includes an assessment of the contribution of net exports to economic growth in recent years and the factors driving the shift from a deficit to a surplus on Malta’s current account of the balance of payments.

The report notes that the Maltese economy continued to grow robustly during 2016, extending the strong pace of activity recorded in recent years and outperforming European Union peers, as structural reforms in energy, the labour market and the benefit system boosted potential output.

Real GDP grew by 5% during the year under review, and was primarily driven by net exports. Domestic demand also supported the expansion, but its contribution was small in relation to that of external trade.

Sector data show that services activities remained the main driver of economic growth, with a smaller contribution stemming from the manufacturing sector. In contrast, construction activity declined slightly, driven by developments in the non-residential segment.

Prudence in the management of public finances, particularly through further reduction in debt below the 60% to GDP mark and a surplus of 1% of GDP, contributed significantly to stability.

The Central Bank supported growth through accommodative monetary policy and measures to enhance access to credit.

Results for 2017 so far confirm these trends.

Although the pace of GDP growth moderated compared with 2015, it remained much higher than that registered in the euro area. The bank’s latest projections, which were concluded in November, suggest that after three years of very strong growth, the pace of activity is likely to slow down to around 4% in 2017 and 2018.

The strong pace of economic expansion was reflected in the labour market. Employment continued to rise whilst unemployment declined, reaching a historical new low.

Labour Force Survey data show that employment expanded at an average annual rate of 2.8% in the first nine months of 2016. The increase in the number of jobs was driven by full-time employment, which went up by 6,160 in absolute terms.

The labour force expanded by 2.2% mainly due to strong gains in female activity rates, although male participation rates also rose.

Despite increases in labour supply, the unemployment rate continued its downward trend, falling to 4.9%.

Jobsplus data also point to favourable labour market conditions, with the average number of registered unemployed during 2016 as a whole down by almost one-third over 2015.

Turning to price developments, the Report notes that the average annual rate of inflation based on the Harmonised Index of Consumer Prices moderated to 0.9% in 2016, from 1.2% in 2015. This moderation was driven by slower growth in prices for services.

Although prices in Malta were rather muted compared with historical trends, HICP inflation was above that in the euro area, which averaged 0.2% during the year. The HICP inflation in Malta is set to ease from 1.2% in 2015 to 0.9% in 2016, before picking up to 1.9% by 2019 according to the bank’s projections.

Residents’ deposits continued to grow, although the rate of increase slowed down compared with 2015. The low level of interest rates contributed to a further shift towards overnight deposits. Growth in credit to Maltese residents slowed in 2016, with this moderation driven by slower growth in credit to general government. Meanwhile, interest rates on deposits and loans to Maltese residents fell further, as did yields on Treasury bills and government bonds.

As regards fiscal developments, in the third quarter of 2016, the general government balance recorded a surplus of 0.6% when measured on a four-quarter moving sum basis, a significant improvement when compared with a 1.3% deficit in 2015.

This improvement in the government balance was mainly attributed to lower capital expenditure and higher current revenue.

The government debt-to-GDP ratio declined by 0.9 percentage point, to 59.7%. This decline was driven by positive developments in the primary balance. Strong economic growth also contributed, as the rate of GDP growth surpassed the effective rate of interest paid by government on its borrowing.

In its macroeconomic outlook, the bank said that economic activity is expected to remain robust and above historical averages. However, it is set to decelerate from recent highs.

Domestic demand is projected to remain the major growth contributor reflecting low unemployment rates and a pick-up in wages.

Net exports are also expected to contribute strongly mainly through services exports. Labour shortages will however remain a constraint on economic growth.

The predicted strong growth in demand is set to be supported by potential output.

Explaining its medium-term projections of potential GDP growth, the bank said that potential output growth is set to remain above the historical average over the medium term.

After 2020, the potential output growth is mainly driven by TFP and the capital stock. The contribution of labour is set to decelerate in the medium term due to demographic factors.

Taking a longer term outlook, the bank said that baseline scenario suggests Malta’s potential growth will stabilise at around 3.25% between 2021 and 2025, above the country’s historical growth rate.

The medium-term outlook is brighter compared to that of the euro area, which should result in further convergence.

The longer term outlook improves further the sustainability of public debt and current account performance.

Going further, however, economic growth will have to increasingly rely on higher factor productivity gains.

During 2016 the bank continued to implement the Eurosystem’s monetary policy stance in Malta, through standing facilities, regular liquidity-providing operations and the Public Sector Purchase Programme.

Given ample liquidity, credit institutions established in Malta increased the level of excess funds held in overnight facilities with the bank and reduced participation in the regular liquidity-providing operations.

Through the PSPP, the bank bought approximately €700 million worth of Maltese government securities by the end of 2016.

The PSPP contributed to a further expansion in the bank’s balance sheet, with total assets reaching €5.5 billion at the end of