The Central Bank has released its review of the second quarter of 2020 showing a steep decline in Gross Domestic Product by 16.2 per cent in annual terms amid high levels of uncertainty and the introduction of various containment measures in response to COVID-19. This follows a 1.4 per cent year-on-year increase in the first quarter.
The Bank said that the contraction in the second quarter, which was the strongest on record, was underpinned by a sharp decline in both domestic demand and net exports.
Growth in potential output moderated to its lowest since 2003. When measured as a four-quarter moving average, the output gap was estimated at -4.5 per cent in the second quarter, well below the 0.2 per cent estimated in the first quarter.
The Bank’s Business Conditions Index (BCI) was also negatively affected by the exceptionally difficult economic environment triggered by COVID-19, falling deeper into negative territory. The BCI suggests that economic conditions stood significantly below their long-term average. The index also stood well below estimates during the 2009 recession.
Labour market conditions weakened, reflecting the impact of the COVID-19 pandemic. Employment rose at a much slower pace than in the first quarter. The unemployment rate based on the Labour Force Survey (LFS) increased compared to the preceding quarter and a year earlier.
Nevertheless, the impact of COVID-19 on unemployment was mitigated by government measures aimed at protecting employment as well as firms’ reliance on shorter working-time arrangements. At 4.4 per cent, the unemployment rate in Malta remained below that in the euro area, but rose above the Bank’s structural measure.
Annual inflation based on the Harmonised Index of Consumer Prices (HICP) moderated to 1.0 per cent in June from 1.2 per cent in March, driven by slower growth in the prices of services and energy. Inflation based on the Retail Price Index (RPI), which only takes into account purchases made by Maltese households, eased to 0.7 per cent in June, from 1.1 per cent three months earlier. Meanwhile, producer output prices fell in annual terms.
Malta’s unit labour cost (ULC) index accelerated in the second quarter, reflecting a sharp drop in productivity as a result of the contraction in activity triggered by the pandemic.
Meanwhile, Malta’s harmonised competitiveness indicators (HCIs) pointed to a deterioration in international competitiveness, largely reflecting unfavourable exchange rate developments.
In the second quarter of 2020, the balance on the current account recorded a deficit, which contrasts with a surplus in the second quarter of 2019. This was mainly attributable to a sharp decline in net services receipts, largely on account of the travel ban imposed to limit the spread of the virus.
However, when measured on a four-quarter moving sum basis, the current account showed a surplus equivalent to 1.3 per cent of GDP. The cyclically-adjusted measure was estimated at 4.9 per cent of GDP, indicating that Malta’s current account developments largely reflect structural factors.
Public finances were considerably impacted by the COVID-19 pandemic and the general government balance deteriorated significantly. When measured as a four-quarter moving sum, the general government balance registered a deficit of 5.1 per cent of GDP in the second quarter of 2020, against a deficit of 1.7 per cent in the previous quarter.
Meanwhile, the general government debt-to-GDP ratio rose to 51.1 per cent, from 44.0 per cent at end-March.
During the quarter under review, Maltese residents’ deposits with monetary financial institutions (MFIs) in Malta continued to expand. The shift to overnight deposits persisted in an environment of low interest rates and a continued preference for liquidity.
Meanwhile, credit to Maltese residents expanded at a faster pace, reflecting stronger growth in credit to general government, partly reflecting banks’ purchases of new Malta Government Stocks (MGSs) issued by the Government to fund economic support to the private sector.
By contrast, credit to residents outside general government grew at a more moderate rate. The annual rate of change of loans to nonfinancial corporations (NFCs) was above that recorded three months earlier.
According to the Bank’s Financial Conditions Index (FCI), financing conditions tightened significantly when compared with the first quarter of the year, while remaining more favourable than at the time of the global financial crisis.
In June, the weighted average interest rate on deposits held by Maltese residents with domestic banks was six basis points lower compared with a year earlier. The weighted average lending rate paid to resident MFIs by households and NFCs also decreased by six basis points over this period. Hence, the spread between the two was unchanged compared to a year earlier.
Meanwhile, the primary market yield on Treasury bills fell from that prevailing at the end of March. By contrast, secondary market yields on 5- and 10-year MGS rose. Domestic share prices regained some of their losses and ended the June quarter at a higher level compared with end-March.
In response to the COVID-19 pandemic and subsequent containment measures, the Bank issued Directive No. 18 to regulate the temporary suspension of debt repayments on credit facilities advanced by credit institutions to borrowers prior to April 2020.
As at end of June 2020, 9,492 businesses and households were benefiting from a moratorium on repayments on total outstanding loans amounting to around €1.8 billion.
Furthermore, in order to alleviate liquidity shortfalls as a result of the pandemic, in April 2020 the Government launched the Malta Development Bank (MDB) COVID-19 Guarantee Scheme (CGS) which provides guarantees to commercial banks with the aim of enhancing access to new working capital for businesses. By end June 2020, 255 facilities were approved under this scheme, covering total sanctioned lending of €161.1 million.
During the quarter under review, central banks continued to provide liquidity support to sustain the smooth functioning of financial markets and the flow of credit to the economy.
The Governing Council of the European Central Bank (ECB) reinforced its accommodative monetary policy stance. The interest rates on the main refinancing operations, on the marginal lending facility and on the deposit facility were held unchanged at 0.00 per cent, 0.25 per cent, and -0.50 per cent respectively.
Furthermore, the Governing Council reiterated that it expected the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
It also reiterated its intention to reinvest in full the principal payments from maturing securities under the asset purchase programme (APP) for an extended period of time past the date when it starts raising the key ECB interest rates and in any case for as long as necessary.
At the end of April, the Governing Council announced a package of monetary policy measures aimed at supporting the euro area economy in the face of economic disruption and heightened uncertainty. These included a further easing of the conditions on the targeted longer-term refinancing operations (TLTRO III) and the launch of a new series of seven non-targeted pandemic emergency longer-term refinancing operations (PELTROs).
In early June, the Governing Council also decided to increase the envelope for the Pandemic Emergency Purchase Programme (PEPP) by €600 billion to a total of €1,350 billion. In addition, the horizon for net purchases under the PEPP was extended to at least the end of June 2021.