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The last quarter of 2021 saw a strong improvement in business conditions, according to the Central Bank of Malta (CBM), buoyed by a narrowing output gap and an increase in employment activity.

In its Quarterly Review, which analyses in depth economic and financial developments in Malta and abroad during the last months of last year, the CBM noted that economic activity continued to recover from the impact of the COVID-19 pandemic.

Growth remained robust, as real GDP rose by 10 per cent in year-on-year terms. By the end of the year, GDP was slightly above the level that prevailed before the pandemic.

Potential output growth stood at 4.3 per cent in the fourth quarter of 2021, up from 3.8 per cent in the previous quarter. The Bank’s estimate of the output gap, while still negative, narrowed, indicating that although the economy’s productive capacity remains somewhat underutilised, activity is gradually normalising.

The CBM’s Business Conditions Index stood above its historical level, reflecting strong increases in several sub-components of the index over the fourth quarter of 2020, when most economic variables were subdued due to the COVID-19 pandemic.

The European Commission’s Economic Sentiment Indicator edged down from the level recorded in the third quarter but remained above its long-term average and its pre-pandemic level. This, the CBM noted, may reflect the slightly lower level of COVID-19 restrictions compared to 2020 as well as a further increase in vaccination rates achieved in the second half of the year.

Developments in the labour market remained positive. Employment remained above pre-pandemic levels while activity rates rose further. The unemployment rate continued to decline, falling to 3.2 per cent from 3.6 per cent in the previous quarter, and well below the 4.4 per cent recorded a year earlier. Malta’s unemployment rate also stood well below the average rate of 7.4 per cent for the euro area.

Inflation picked up during the quarter under review. The annual rate of change of the Harmonised Index of Consumer Prices stood at 2.6 per cent in December, well above the 0.7 per ent observed in September. All components except energy prices registered faster growth, although services inflation was the main driver behind the increase in inflation.

Meanwhile, annual inflation based on the Retail Price Index – which only takes into account expenditure by Maltese residents – rose to 2.6 per cent in December from 2.2 per cent in September.

During the fourth quarter of 2021, the general government deficit widened when compared to that recorded in the corresponding period of 2020. When measured on a four-quarter moving sum basis, the general government deficit reached eight per cent of GDP in 2021, somewhat lower than the 9.5 per cent recorded in 2020.

The general government debt-to-GDP ratio rose to 57 per cent from 53.4 per cent at end-2020. Government’s net financial worth as a share of GDP deteriorated in the quarter under review.

The Review also presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank.

The Governing Council maintained an accommodative monetary policy stance during the fourth quarter of 2021. Key ECB policy rates remained unchanged at low levels.

In December, the Governing Council stated that the progress in economic recovery and in reaching its medium-term inflation objective permitted a gradual reduction in the pace of its asset purchase over the coming quarters.

In fact, the Pandemic Emergency Purchase Programme ended in March 2022 and the pace of net purchases under the Asset Purchase Programme (APP) for the second quarter of this year was scaled down.

At the same time, the Council stated that conditional on the inflation outlook, net purchases under the APP could end in the third quarter of 2022, and that any increases to interest rates would take place sometime after the end of net purchases under this programme and would be gradual.


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