Signs of possible improvement in economic conditions

The Central Bank's latest business perception survey suggests a possible improvement in economic conditions for the rest of the year.

The Bank's review for the first quarter of this year notes, however, that the deficit on the Consolidated Fund was larger than in the same period last year.

The Bank's 111-page review analyses economic and financial developments both in Malta and abroad in the first quarter of this year.

The Bank's latest business perceptions survey, conducted in April and May, shows a recovery in business confidence in the second quarter - after three successive quarters in which sentiment was negative on balance.

This resulted from renewed optimism in both export and domestically-oriented firms.

Overall, most respondents anticipated an upturn in activity in the short-term. While most locally-oriented manufacturing firms were expecting their profitability to decline, exporters were however anticipating a recovery in profitability.

Meanwhile, labour market conditions were generally expected to improve and average wages to rise.

In the quarterly review proper, the Bank says that factors contributing to the widening of the deficit on the Consolidated Fund included the new expenditure commitments related to EU membership and the removal of the remaining duties on EU products.

It says, however, that the entry of the Maltese lira in ERM II last May had a positive impact on financial markets sentiment, with the interest rate differential in favour of the Maltese lira increasing and the level of the bank's external reserves stabilising.

As a result, the bank decided to leave the central intervention rate unchanged for the remainder of the second quarter.

In its assessment of the monetary sector, the review notes that monetary growth remained weak in the first quarter, partly reflecting shifts from bank deposits to alternative assets, although the running down of deposits for consumption purposes may also have contributed.

Domestic credit continued to increase in the quarter, driven mainly by growth in loans to the private sector but the net foreign assets of the banking system contracted further.

Short-term interest rates and yields on longer-term bonds remained stable over this period. In the equity market, the Malta Stock Exchange share index rose, reflecting broad-based investor interest. In April, money market rates moved up in tandem with official rates.

The Central Bank review notes that the economy contracted marginally in the first three months of this year, following two consecutive quarters of growth, reflecting weak export activity, particularly in the electronics sector.

The tourism sector, too, failed to provide a significant boost to growth. Nevertheless, some improvement was reported in the labour market, with higher employment and a decline in both the unemployment rate and the number of those registering for work.

Although the rising trend in the official inflation rate moderated, upward pressures on prices persisted, as developments in international oil prices affected fuel costs and, more indirectly, utility prices.

Turning to the balance of payments, the review highlights the continued widening of the current account deficit in the first quarter of 2005 when compared to the same quarter last year. This was the result of a larger merchandise trade gap, which outweighed positive balances on the services and income components.

After excluding movements in the official reserves, the surplus on the capital and financial account registered an increase over the first quarter.

The review observes that in the first quarter, the lira appreciated against the euro and the Japanese yen but lost ground against the US dollar and the sterling.

In the month prior to its participation in ERM II on May 2, when it was fixed at a level of Lm0.42 against the euro, the lira gained further ground against the European unit. At the same time it continued to depreciate steadily against both the dollar and the sterling.

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