Structural reforms needed for more productivity and growth - Central Bank review

The Central Bank's latest review for the first quarter of 2011 has appealed for a focus on further structural reforms to raise productivity and enhance economic growth, as the international economy faces heightened uncertainty.

"Improved productivity depends on investment, both in the physical infrastructure as well as in human resources. Meanwhile, higher female participation in the labour force would help boost employment levels," the Central Bank said.

Malta's national bank also hinted at a guarded support for Brussels' position that the Cost Of Living Allowances increases should be linked to productivity gains. Wage awards should, as much as possible, mirror productivity gains. Stronger productivity and restrained cost increases would also improve Malta's attractiveness as an investment location."

The Central Bank also warned the banking sector to remain prudent, in terms of its capital adequacy and liquidity levels, the mix of funding sources and its provisioning policy. "A healthy banking system, which is able to provide households with a channel for savings and firms with credit to finance their investment, is a vital element in supporting economic growth."

Gross domestic product (GDP)
in Malta marginally contracted by 0.1% on
an annual basis in the last quarter
of 2011, after having increased by
2.5% in the previous quarter. The
decline was driven by a reduction
in domestic demand, which offset
a significant positive contribution
from net exports. Over the year as a whole, annual real GDP growth in Malta remained positive at 2.1%, exceeding the euro area's by 0.7 percentage point, but the country entered an official recession in March 2012.

Domestic demand contracted in the last quarter of the year after four consecutive quarters of growth, declining by 8.2% compared with an increase of 1.9% in the previous quarter. It contributed negatively to real GDP growth by the same amount. The main component of domestic demand driving this fall was inventories, which also include the residual error.

Gross fixed capital formation (GFCF) declined for the fourth consecutive quarter, although the rate of contraction slowed down to 9.1% from 21.4% in the third quarter of 2011. Consequently, it lowered real GDP growth by 1.4 percentage points.

This drop mainly reflected a fall in capital expenditure on machinery & equipment. The decline partly reflects a base effect following substantial one-off investments in the energy sector in the last quarter of 2010. Residential construction also decreased; however, this was outweighed by an increase in non-residential construction, reflecting work on a major infrastructural project - ostensibly the €80 million City Gate project which was not expressly mentioned in the Central Bank review.

A contraction of 8.1% in the gross value added in the manufacturing sector during the fourth quarter was reflected in a negative contribution of 0.9 percentage point to overall nominal GDP growth. There was also a small negative contribution by the construction sector.

The construction confidence indicator rose from -34 in December to -31 in March. This improvement reflected a smaller number of respondents considering their current order books to be below normal level.

On the other hand, a marginally higher number of respondents expressed an intention to reduce their labour complement in the subsequent three months. Furthermore, operators continued to indicate insufficient demand as the primary factor limiting activity.

Consumer confidence remained weak in the first quarter. The consumer confidence indicator fell by 3 percentage points during the quarter, to -39 in March. Consumers were more pessimistic about their ability to save, their own financial position and the general economic situation over the following 12 months. In contrast, the share of respondents foreseeing a rise in the number of unemployed remained unchanged.