Issue link: https://maltatoday.uberflip.com/i/1427300
2 NEWS 11.11.2021 THE Central Bank of Malta has pub- lished the fourth issue of its Quarterly Re- view for 2021, which analyses economic and financial developments in Malta and abroad during the second quarter of 2021. In the second quarter of 2021, econom- ic activity continued to be affected by the COVID-19 pandemic and associated containment measures, although these were less stringent than a year earlier. Real GDP increased by 13.4% over the corre- sponding quarter of 2020. is followed a contraction of 1.3% in the previous quar- ter. Notwithstanding the recent increase, the GDP level still stood 3.6% below that which prevailed in the second quarter of 2019. On an annual basis, GDP growth was driven by domestic demand and to a lower extent, net exports. Sector data show that the expansion was primarily driven by the services sector, especially the sector comprising wholesale and retail trade, transportation, accommodation and related activities. is sector how- ever, continued to be severely affected by the pandemic, with its gross value added standing almost 35.0% lower than its level in the corresponding quarter of 2019. Potential output growth rose marginal- ly to 1.8% in the second quarter of 2021, from 1.9% in the previous quarter. e Bank's estimate of the output gap nar- rowed but stood firmly in negative ter- ritory, as demand remained short of the economy's potential, especially in tourism and entertainment-related sectors. e Bank's Business Conditions Index rose sharply in the second quarter of 2021, reflecting strong year-on-year in- creases in a number of variables, although economic activity levels remained below those prevailing before the pandemic. For example, the European Commission's Economic Sentiment Indicator continued to recover from the trough recorded in 2020, standing above its long-term aver- age and exceeding the level recorded just before the pandemic. is increase might reflect the easing of the COVID-19 re- strictions and related improvement in ac- tivity as well as the high vaccination rate achieved during the quarter. During the second quarter of 2021, the labour market continued to recover, with employment returning to pre-pandemic levels and unemployment falling further. According to the Labour Force Survey, employment and activity rates increased, standing above those prevailing in the second quarter of 2019 and only mar- ginally below those recorded in the first quarter of 2020. e unemployment rate stood at 3.5%, lower than the 4.0% registered in the pre- vious quarter, and the rate of 4.6% record- ed a year earlier. It also stood below the average rate of 7.9% in the euro area. e historically low jobless rate in Malta, in part reflects ongoing government COV- ID-19 support, as well as the recovery in demand. Inflation remained low during the quar- ter under review. Annual inflation as measured by the Harmonised Index of Consumer Prices stood at 0.2% in June, up from 0.1% in March. is margin- al increase was mainly driven by faster growth in the prices of unprocessed food and non-energy industrial goods. Annual inflation based on the Retail Price Index – which only takes into account expend- iture by Maltese residents – rose from 0.4% in March to 1.5% in June. During the second quarter of 2021, gen- eral government finances improved even though they remained in deficit. e gen- eral government registered a smaller defi- cit when compared with the correspond- ing quarter of 2020 as the increase in revenue outweighed that in expenditure. When measured on a four-quarter mov- ing sum basis, the general government deficit stood at 8.6% of GDP in the second quarter of 2021 – down from 10.0% in the first quarter. Meanwhile, the general gov- ernment debt-to-GDP ratio increased to 59.5% from 57.5% as at end-March 2021. As the stock of financial liabilities held by the government rose at a slower pace than the stock of financial assets, the net finan- cial worth as a share of GDP improved in the quarter under review. e Review also presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank. e Governing Council maintained its accommodative monetary policy stance during the second quarter of 2021. It confirmed that the Eurosys- tem will continue to conduct net asset purchases under the pandemic emergen- cy purchase programme (PEPP) until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. In its June meeting, the Governing Council stated that it ex- pected purchases under the PEPP over the following quarter to be conducted at a significantly higher pace than during the first months of this year. However, in re- cent meetings the Governing Council an- nounced that this pace would be reduced, while the ECB President expressed the view that the PEPP will end at the end of March 2022. Meanwhile, the Governing Council con- firmed that net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion for as long as necessary to reinforce the accommoda- tive impact of the ECB's policy rates, and to end shortly before these rates begin to increase. e Review also presents a study of methods used to assess the timing of the Maltese business cycle. Furthermore, it looks at recent growth in the professional, scientific, technical, administrative and support service activ- ities sectors. Q2 real GDP increased by 13.4% over same period in 2020 CENTRAL BANK OF MALTA Quarterly Review 2021:4 9 63.0%. Employment showed further signs of recovery as it rose by 0.7% in quarter-on-quarter terms, after having risen by 0.4% in the first quarter. Following this increase, the annual rate of change turned positive, although there were around 3.4% fewer persons in employment com- pared to the second quarter of 2019. Non-farm payroll data show that the number of persons in employment increased compared with the first quarter of the year in all major sectors, particularly in the leisure and hospitality industry and professional and business services. The average unemployment rate declined further to a five-month low of 5.9%, from 6.2% in the preceding quarter, but remained elevated compared with pre-pandemic rates (see Chart 1.1). The annual rate of change of the US consumer price index (CPI) more than doubled over the quarter under review, stand- ing at 5.4% in June, from 2.6% in March (see Chart 1.2). This primarily reflected develop- ments in energy inflation, which stood at 24.5% in June, up from 13.2% in March. Furthermore, service price inflation increased to 3.1% in June from 1.6% in March. Prices of commodi- ties excluding food and energy also increased at a faster pace. On the other hand, food prices grew at a slower pace. Reflect- ing developments in services prices and commodities other than food and energy, infla- tion excluding food and energy increased to 4.5% in June, from 1.6% three months earlier. During the second quarter of 2021, the Federal Open Mar- ket Committee (FOMC) reiter- ated its commitment to use its full range of tools to support the economy in this challeging time, thereby promoting its maximum employment and price stabil- ity goals. The target range for the federal funds rate was kept unchanged in a range between 3 5 7 9 11 13 15 Q1 2016 Q3 Q1 2017 Q3 Q1 2018 Q3 Q1 2019 Q3 Q1 2020 Q3 Q1 2021 Euro area United States United Kingdom Chart 1.1 UNEMPLOYMENT RATE (percentage of the labour force; quarterly average; seasonally adjusted) Sources: Bureau of Labor Statistics, US; Eurostat; Office for National Statistics, UK. -1 0 1 2 3 4 5 6 J 2016 M M J S N J 2017 M M J S N J 2018 M M J S N J 2019 M M J S N J 2020 M M J S N J 2021 M M Euro area United States United Kingdom Chart 1.2 CONSUMER PRICE INFLATION (annual percentage changes) Sources: Bureau of Labor Statistics, US; Eurostat; Office for National Statistics, UK. CENTRAL BANK OF MALTA Quarterly Review 2021:4 9 Non-farm payroll data show that the number of persons in employment increased compared with the first quarter of the year in all major sectors, particularly in the leisure and hospitality industry and professional and business services. The average unemployment rate declined further to a five-month low of 5.9%, from 6.2% in the preceding quarter, but remained elevated compared with pre-pandemic rates (see Chart 1.1). The annual rate of change of the US consumer price index (CPI) more than doubled over the quarter under review, stand- ing at 5.4% in June, from 2.6% in March (see Chart 1.2). This primarily reflected develop- ments in energy inflation, which stood at 24.5% in June, up from 13.2% in March. Furthermore, service price inflation increased to 3.1% in June from 1.6% in March. Prices of commodi- ties excluding food and energy also increased at a faster pace. On the other hand, food prices grew at a slower pace. Reflect- ing developments in services prices and commodities other than food and energy, infla- tion excluding food and energy increased to 4.5% in June, from 1.6% three months earlier. During the second quarter of 2021, the Federal Open Mar- ket Committee (FOMC) reiter- ated its commitment to use its full range of tools to support the economy in this challeging time, thereby promoting its maximum employment and price stabil- ity goals. The target range for the federal funds rate was kept unchanged in a range between 3 5 7 9 11 13 15 Q1 2016 Q3 Q1 2017 Q3 Q1 2018 Q3 Q1 2019 Q3 Q1 2020 Q3 Q1 2021 Euro area United States United Kingdom Chart 1.1 UNEMPLOYMENT RATE (percentage of the labour force; quarterly average; seasonally adjusted) Sources: Bureau of Labor Statistics, US; Eurostat; Office for National Statistics, UK. -1 0 1 2 3 4 5 6 J 2016 M M J S N J 2017 M M J S N J 2018 M M J S N J 2019 M M J S N J 2020 M M J S N J 2021 M M Euro area United States United Kingdom Chart 1.2 CONSUMER PRICE INFLATION (annual percentage changes) Sources: Bureau of Labor Statistics, US; Eurostat; Office for National Statistics, UK. Unemployment Rate (percentage of the labour force; quarterly average) Official Interest Rates (percentages per annum; end of month) Consumer Price Inflation (annual percentage changes) 0.00% and 0.25% (see Chart 1.3). The Committee confirmed that it expects to maintain this target rate until labour market conditions have reached levels consistent with its assessments of maximum employment, and inflation has risen to 2.0% and is on track to moderately exceed 2.0% for some time. In addi- tion, the Federal Reserve said that it will continue to increase its holdings of Treasury securi- ties by at least USD 80 billion per month and of agency mort- gagebacked securities by at least USD 40 billion per month until substantial further progress has been made toward its policy goals. -0.60 -0.20 0.20 0.60 1.00 1.40 1.80 2.20 2.60 J 2016 M M J S N J 2017 M M J S N J 2018 M M J S N J 2019 M M J S N J 2020 M M J S N J 2021 M M US federal funds target range (shaded) ECB MRO rate Bank of England Bank Rate ECB Deposit facility rate ECB Marginal lending facility rate Chart 1.3 OFFICIAL INTEREST RATES (percentages per annum; end of month) Sources: ECB; Federal Reserve; Bank of England.