Economic activity in Malta started showing signs of recovery in the first three months of the year although GDP growth remained negative that quarter, the Central Bank said in its quarterly review.

The period under review – from January to the end of March - coincided with a rise in active COVID-19 cases and the re-introduction of containment measures in March. These included the shutdown of most shops and catering establishments, as well as school closures.

Real GDP fell by 1.8% in annual terms during that period, the Central Bank noted – a more muted decline than that experienced in the previous quarter, when GDP had contracted by an annual 7.8%.

The economic contraction was underpinned by a sharp fall in net exports, as the contribution of domestic demand was positive.

An economic snapshot of the first quarter of 2021. Infographic: Central Bank of Malta

The economic contraction was primarily driven by the services sector, reflecting the fact that tourism-related activities remained relatively depressed, as well as the shutdown of non-essential services in March 2021.

Activity also decreased in the manufacturing and construction sectors, although the dampening effect on overall GDP was relatively minimal. 

Potential output growth picked up, standing at 1.9% from 0.3% in the previous quarter – mainly due to an improvement in the contribution of total factor productivity, which had turned negative in 2020.

The bank’s estimate of the output gap remained firmly in negative territory, as demand remained short of the economy’s potential. 

Business conditions index

The bank’s business conditions index showed that business activity started to improve on a year-on-year basis, though economic activity levels remained below those prevailing before the pandemic.

The European Commission’s economic sentiment indicator continued to recover from the trough recorded in 2020 as a result of the pandemic but remained low from a historical perspective as COVID-19 continued to weigh on consumer and business confidence throughout the quarter. 

Labour market continues to recover

The labour market also continued to recover, as employment increased in quarter-on-quarter terms, while unemployment decreased.

However, according to the Labour Force Survey, employment levels remained below those that prevailed pre-pandemic. The unemployment rate stood at 3.9%, lower than the 4.4% registered in the previous quarter, but higher than the 3.6% recorded a year earlier. Nonetheless, the unemployment rate remained low from a historical perspective and well below that in the euro area, which stood at 8.5%.

Inflation remains low

Inflation remained low. Annual inflation as measured by the Harmonised Index of Consumer Prices eased to 0.1% in March, from 0.2% in December, driven by slower growth in the prices of services and processed food. Annual inflation based on the Retail Price Index – which only takes into account expenditure by Maltese residents – stood at 0.4%, up from 0.2% in December.

General government finances

General government finances continued to be negatively impacted by COVID-19. The general government deficit was significantly wider than that recorded in the corresponding period a year earlier.

When measured on a four-quarter moving sum basis, the general government balance registered a deficit of 10.6% of GDP, against a deficit of 10.2% in the fourth quarter of 2020.

The general government debt-to-GDP ratio increased to 59% from 54.8% as at end-December 2020. Although the stock of financial assets held by the government increased during the period under review, this was offset by a larger increase in financial liabilities. Consequently, the net financial worth as a share of GDP worsened. 

The latest issue of the Quarterly Review for 2021 is available here.