CBM reviews Q2, reduces growth rate by 0.7%

The Central Bank of Malta yesterday its quarterly review for September 2001, which analyses domestic and international economic and financial developments during this year’s second quarter

Growth forecast
The Bank points out that, in common with many other monetary authorities, the Central Bank of Malta revised its growth forecasts for 2001 largely because of the deteriorating international economic environment. As a result, the forecast rate of real GDP growth for the year was lowered to 3.5 per cent from 4.2 per cent.
In the light of additional information on domestic and international economic developments, including downward adjustments to global growth forecasts, the bank notes that it is likely that this forecast will need to be revised further in the coming months.
Central Bank activities
The Central Bank explains how it had left official interest rates unchanged during the second quarter. In August, however, then it had lowered both the central intervention rate and the discount rate by 25 basis points to 4.5 per cent.
Meanwhile, the Bank further eased its monetary stance in September, when it reduced the reserve requirement ratio imposed on banks by one percentage to four per cent of their deposit liabilities.
The Bank notes that these monetary policy measures were implemented against a background of mounting evidence of a global economic slowdown. During the second quarter, the slowdown in the US became more pronounced, Japan plunged deeper into recession and the European economies continued to perform below their potential. Moreover, the terrorist attacks on the United States on 11 September added to the downside risks to the global economy. In response, major central banks cut official interest rates repeatedly. These reductions in interest rates abroad led to a growing premium on Maltese lira interest rates, which favoured an easing of the Bank’s monetary policy stance.
Domestic economy
Turning to the domestic economy, the Bank observes that conditions were also compatible with an easing of monetary policy. Indeed, as the global economic performance deteriorated, growth slowed down during the first half of the year. During the second quarter real GDP contracted by 0.6 per cent mainly as a result of a drop in exports by the electronics sector. This offset some acceleration in public and private consumption. Meanwhile a drop in investment spending, as well as a cut in firms’ inventory levels, contributed to a narrowing of the trade gap.
Effect of global slowdown
Official data confirmed earlier indications that some key sectors of the domestic economy were being adversely affected by the international economic slowdown even before the terrorist attacks. Respondents to the Bank’s latest business perceptions survey in fact had reported below-normal levels of activity during the second quarter. However, although the electronics sector appeared to be especially hard-hit, other segments of manufacturing industry registered satisfactory levels of activity. Furthermore, the survey also indicated some recovery in the tourism industry, as well as in the distribution and services sectors, with the latter indicating a moderate rise in domestic demand. Indeed, although full-time employment expanded at a slower rate during the second quarter, the unemployment rate dropped to 4.7 per cent at the end of June.
Headline inflation rate
The downward trend in the headline rate of inflation observed during the previous three quarters was reversed during the second quarter, with the rate rising marginally to 1.95 per cent in June. However, the year-on-year rate of inflation accelerated to 3.1 per cent. In the absence of strong demand pressures on prices, the acceleration in inflation largely reflected a combination of higher food prices, which mainly resulted from supply-side factors, and an increase in the cost of imports.
Balance of payments
The Review then analyses developments in the balance of payments. During the June quarter the current account of the balance of payments swung into surplus as falling imports of industrial supplies and capital goods led to a significant narrowing of the merchandise trade gap. At the same time the positive balance on trade in services increased. These developments were also broadly reflected in the data for the first six months of the year, which saw the deficit on the current account shrinking considerably. The improved current account performance, together with the favourable interest rate differentials referred to earlier, was reflected in a recovery in the Central Bank’s external reserves, which increased during the second quarter and continued to rise in July and August.
Government finance
In reviewing Government finance the Review observes that the underlying fiscal stance remained expansionary, with the deficit widening during the first six months of the year as expenditure grew more rapidly than revenue.
Commenting on monetary and financial developments, the Review states that broad money continued to expand robustly despite the issue of Government stocks on the primary market in May. The net foreign assets of the banking system recovered and net claims on Government increased. But bank claims on the private and parastatal sectors declined. Meanwhile the aggregate balance sheet of the deposit money banks continued to expand, but at a markedly slower pace than in previous quarters. Banks’ profits rose, as non-interest income recovered and provisions for bad debts were reduced. Their capital structure and liquidity levels remained healthy. According to the Review, although Treasury bill yields rose, reflecting the Government’s demand for funds, Government bond yields were stable while equity prices fell further.
Currency markets
Assessing developments in international currency markets, the Review notes that the US dollar strengthened against other major currencies during the second quarter. Meanwhile, the euro was undermined by a slew of negative economic data. As a result, the Maltese lira continued to strengthen against the euro and to lose ground against the US dollar and, to a lesser extent, sterling.