11 - 17 April 2001
The economy as viewed by the Central Bank
In the first of a series, The Business Times provides and in-depth view of the Central Bank of Malta's recently released report for last year. In this segment the CBM's economical projections for this year, how the domestic economy performed last year as a whole, the nation's supply and demand, the labour market, the rebounding fixed investment levels consumer prices and wages, and the manufacturing, tourism and construction industries are explored
Projections for 2001
According to its projections, the Central Bank estimates that in 2001 underlying GDP growth should be slightly higher than in 2000, as the balance on trade in goods and services is projected to improve substantially.
The latter will be mainly driven by a deceleration in import growth, especially of capital goods, as the electronics sub-sector's capital programme is largely completed.
Exports should also grow at a faster pace than in 2000, notwithstanding the fact that the electronics industry might be temporarily affected by a cyclical downturn in the global semiconductor market.
The expansion in capacity effected in 2000 is expected to translate into a higher output volume in coming years. At the same time, other export-oriented manufacturing sub-sectors should recover further in view of the resilience of the European economy and the expected strengthening of the euro.
Conversely, tourism activity is forecast to remain at last year's level, especially on account of an anticipated drop in arrivals from Germany. The introduction of better-targeted marketing programmes, following the increased funding for the Malta Tourism Authority, could however lead to an improvement in the second half of the year.
Gross fixed capital formation is expected to stabilise during 2001. While the surge in investment witnessed in 2000 will not be repeated, the commencement of work on a number of projects should boost construction activity.
Private and public consumption should continue to grow at around the same rate as in 2000. This is not expected to result in any significant contraction in the household saving ratio, since disposable income should grow at a faster pace due to higher wages and a slower increase in taxation.
Price inflation should decline slightly, even though imported inflation may rise if the Maltese lira loses ground against the euro. Domestically-induced price pressures are, in fact, expected to decline, reflecting continued fiscal consolidation, the absence of new indirect tax measures in the latest Budget and restrained domestic demand.
The stepping-up of trade liberalisation should also dampen upward pressures on prices, as local manufacturers compete more aggressively to retain market share.
Wage pressures should remain contained, in view of industry's efforts to maintain price competitiveness and restructure.
The rate of job creation is projected to decelerate during 2001, after last year's increase in the demand for labour by the direct production sector.
The employment expansion in the electronics sub-sector was, in fact, mainly of a one-off nature, whereas the locally-oriented manufacturing sub-sectors could continue to shed labour as they become more capital-intensive.
The private services sector, on the other hand, should continue to grow, though operators in the tourism industry may attempt to consolidate their businesses in view of uncertain prospects.
Thus, while the unemployment rate may remain broadly stable at the 2000 level, the structural element in unemployment may be further accentuated.
The Domestic Economy
According to the Central Bank, estimates indicate that real GDP growth in 2000 was more or less on the same level as that of 1999, with the real output of the Maltese economy expanding by about 4.0 per cent.
Export-oriented manufacturing firms, particularly those in the electronics sub-sector, contributed strongly to GDP growth during the year and compensated for a sluggish performance in the tourist industry and in the locally-oriented manufacturing and services sectors. The rate of economic expansion was also dampened by the significant drop in the profits of certain state-owned companies as a result of the sharp increase in international oil prices.
The electronics sub-sector accounted for a significant rise in investment, which boosted imports of capital goods and led to a deterioration in net exports of goods and services. In fact, gross fixed capital formation increased significantly in 2000, helped also by a recovery in construction activity.
The rate of job creation accelerated during the year, with employment in the directly productive sectors increasing for the first time since 1995. As a result, the unemployment rate fell to 4.5 per cent, its lowest level in three years.
At the same time, headline inflation rose slightly, reflecting the impact on prices of the changes in indirect taxation announced in the November 1999 Budget.
Underlying inflation, however, continued to drop in line with the trend of the previous three years, reflecting both the restraining influence on demand of fiscal tightening and low imported inflation.
Private consumption expenditure is estimated to have grown by around 3.8 per cent during 2000. This compares with 5.9 per cent in 1999, when consumption was boosted by an exceptional rise in expenditure on motor vehicles.
In spite of a relatively slow growth in personal disposable income, private consumption expenditure appears to have increased at a stronger pace in 2000 compared to the underlying performance in recent years.
The slower growth of personal disposable income was due to the higher employee national insurance contribution rates and the modifications to the income tax bands that increased the average rate of personal income tax. As the slowdown in personal disposable income growth was less than proportionally reflected in consumer expenditure, there was a drop in the saving ratio in 2000
After 1994 the relatively stable relationship between household saving and disposable income broke down. Since 1995, the saving ratio tended to settle at a lower level, while instances of slower growth in disposable income were reflected more in lower saving rather than reduced consumption.
This suggests a structural change in the consumption behaviour of Maltese households, possibly engendered by fiscal reforms, a reassessment of the value of household wealth following the increase in real estate prices in the first half of the nineties, together with easier access to bank credit brought about by the liberalisation of the financial sector.
Government consumption is estimated to have grown at a faster pace during 2000, mainly reflecting a higher wage bill on account of increased employment and higher outlays on health services. However, the relative importance of government consumption as a component of aggregate demand continued to decline, reflecting a tighter fiscal stance.
After having remained subdued over the previous four years, investment rebounded during 2000. This in large part reflected the installation of new equipment in the electronics industry. By contrast, investment levels in other manufacturing sub-sectors, particularly those producing for the local market, were unchanged.
At the same time, investment in construction declined for the fourth year in a row, despite the speeding up of work on the new hospital.
It should, however, be noted that the 1999 data on construction activity had included expenditure on oil exploration and the redundancy payments awarded to workers in a public sector construction firm.
Excluding these exceptional factors, construction activity during 2000 is estimated to have increased by nearly 10 per cent.
External Demand and Supply
At current prices, exports of goods and services surged by 22 per cent in 2000, though this partly reflected the rise in the value of re-exports of oil. In real terms, exports increased by 4.3 per cent, of which the greater part is attributable to the electronics sub-sector.
This was offset by a drop in tourism earnings and in the exports of the rest of the manufacturing sector, both of which had increased in 1999.
The rise in oil prices that affected the value of re-exports also conditioned the value of imports, which increased by 27 per cent overall. Though less pronounced, growth in imports in real terms was a substantial nine per cent.
This mainly reflected the imports of capital goods referred to earlier, which caused the deficit in net exports of goods and services to widen by Lm88.5 million to Lm167.7 million in nominal terms.
The Labour Market
Labour market data indicate that the upward trend in unemployment since 1995 was halted during 2000, reflecting a sharp rise in the gainfully occupied population. As a result, the unemployment rate fell to its lowest level in three years, at 4.5 per cent.
The acceleration in the rate of job creation during the year under review was mainly, but not exclusively, generated by the private sector. In particular, there was a turnaround in the demand for labour by the private direct production sector, primarily in the electronics sub-sector. On the other hand, a number of manufacturing firms, particularly in the textiles, clothing and footwear and the furniture sub-sectors, continued to shed labour.
Another factor contributing to the rise in employment in private direct production was the recovery in the demand for labour by the construction industry.
Employment in private market services grew by around 1,535, or 3.1 per cent during 2000. Nevertheless, the sources of growth in employment within this sector have changed significantly during the last two years.
During 2000, there was a marked deceleration in the demand for labour in the hospitality sector, with the number of jobs rising by half the amount recorded in 1999. This slowdown, which reflected the relatively weak performance of the tourist industry, was, however, more than offset by an expansion of employment in the wholesale and retail sub-sector, where a substantial rise in the number of self-employed was reported.
Part of this expansion might have been due to tighter enforcement of employment regulations rather than to increased opportunities. The community and business services and the other services sub-sectors continued to register improved employment levels.
At the same time, the reported higher employment in the transport, storage and communications sub-sector was partly due to a reclassification of workers, such as tourist guides, who had previously been included in other categories.
As in 1999, part-time employment expanded rapidly during 2000, rising by over 10 per cent. The bulk was again accounted for by persons for whom part-time work constituted their primary occupation. Data on the sectoral breakdown of part-time employment, published for the first time this year, indicate that nearly 75 per cent of part-time jobs are in the services sector, mostly in the community and business, the wholesale and retail and hotels and catering establishments sub-sectors.
Direct production, mainly the agriculture and the food manufacturing sub-sector, employs a further 20 per cent of the part-time workforce, while only five per cent of part-timers are employed in the public sector.
As observed above, the average unemployment rate fell during 2000 for the first time since 1995, as the rate of job creation outpaced the growth in the labour supply.
Unemployment averaged 4.8 per cent of the full-time labour supply during the year, down by 0.5 percentage points from its 1999 level, to end the year at 4.5 per cent. This positive development, however, did not affect the growth, observed in recent years, of the structural element in the unemployment total.
Data relating to the distribution of the unemployed by type of skill, indicate that there was a drop in all categories. The new job opportunities that arose during 2000, particularly in the direct production sector, led to a significant decline in the number of persons seeking manual employment.
Nevertheless, this drop was smaller, in percentage terms, than those recorded in other categories. The number of persons registering for work in the skilled services category fell by more than a third, reflecting recruitment by Government departments. At the same time, the decline in the number of technically trained unemployed was essentially due to the expansion of the electronics industry.
As a result, the proportion of persons on the unemployment register seeking unskilled employment rose slightly, accounting for three-quarters of the unemployed at the end of the year.
Meanwhile, the age structure of the unemployed continued to shift towards the older age categories, while the average duration of unemployment lengthened further. Thus, the proportion of the unemployed aged over 49 years stood at 15.7 per cent at the end of the year, while more than half had been unemployed for over 51 weeks. The increase in the demand for labour thus mainly benefited the skilled
and the relatively young.
Prices and Wages
Retail price inflation edged up during 2000, after having eased during the previous two years. The twelve-month moving average measure of inflation rose by 0.24 percentage points, to 2.37 per cent, compared with the decrease of 0.26 points registered in 1999.
The increase in the Retail Price Index (RPI) did not, however, reflect underlying inflationary pressures, but rather the impact on consumer prices of the changes in indirect taxation introduced in the November 1999 Budget.
Central Bank estimates suggest that underlying inflation, i.e. retail price inflation, netted of changes in indirect taxes and seasonal factors, continued to drop during the year under review.
The 1999 Budget measures are estimated to have added more than one percentage point to the headline rate of inflation during 2000. These measures, however, should be deflationary in the longer term, due to their dampening effect on aggregate demand.
The low rate of imported inflation, which reflected the weakness of the euro against the Maltese lira and the relatively subdued inflation in Malta's main trading partners, was an important factor behind the decline in underlying inflation.
Furthermore, the rise in international oil prices, which fuelled upward price pressures in most economies, had no impact on the domestic price level as it was absorbed completely by Enemalta.
Meanwhile, domestic demand growth remained at a level that precluded any significant domestically-induced inflationary pressures, especially in relation to the expansion of the retail supply base in recent years and the subsequent increase in price competition.
The gradual removal of protective levies also exerted a restraining effect on prices during the year.
Meanwhile, the sub-indices of the RPI that registered the greatest increases were those affected by changes in indirect taxes or subsidies.
In particular, the higher price levels reflected in the housing and the fuel, light and power sub-indices were due to the reduction of rebates on utility bills.
Similarly, the larger increase registered in the transport and communication sub-index was due to the extension of VAT to fuel and telephony services, whereas part of the sharper rise in food prices was caused by the removal of the subsidy on flour.