Oil shocks worse for Maltese economy than shipping disruptions

Oil shocks have a more significant impact on Malta’s economic activity compared to shocks in the shipping industry, according to recent research by the Central Bank of Malta.

The policy note, published last December and authored by Germano Ruisi, focuses on the effects of global oil price swings and disruptions in the shipping industry on the Maltese economy.

With Malta’s heavy reliance on the shipping industry and imported goods, the study shows that both situations cause recessionary effects on the Maltese economy, putting upward pressure on prices.

While both result in recessionary effects, oil shocks have bigger effects than shipping shocks. The study found that a 10% oil shock produces responses that are characterised by a bigger magnitude than those of a 10% shock originating in the shipping industry.

Indeed, shipping disruptions appear to have a slightly less persistent recessionary effect and do not significantly influence domestic energy prices.

But following a global energy disturbance, Maltese food, energy and services prices gradually increase while non-energy industrial goods experience a more abrupt upward pressure.

However, the study acknowledges that the energy subsidies provided by the Maltese government have helped reduce the negative consequences on economic activity and dampened the inflationary pressures in food and services.

In fact, following a 10% energy shock, food and service prices rose respectively by 0.25% and 0.2% in the medium term. Without government intervention, these prices would have risen by 0.5% and 0.45%.

The study also found that inflation in Malta follows closely that of the euro area but is slightly more volatile in its behaviour.

On a global level, the world prices would reach their peak about ten months after such shocks, reaching values of around 0.5% and 0.1% for oil and shipping disturbances respectively.

Malta’s annual inflation in January dropped to 6.8%, the third lowest in the EU but only because the State is heavily subsidising energy, fuels and non-processed foods.

Data published by the National Statistics Office showed that if energy and unprocessed food are excluded from the equation, Malta’s Harmonised Index of Consumer Prices (HICP) is almost a point higher than the euro zone average.

The Maltese government has put aside almost €600 million this year to keep energy, fuel and grain prices stable. The subsidies have been running since last year when the government spent almost €500 million to maintain stability in the energy and grains sectors.

The NSO reported that the largest upward impact on annual inflation in January was measured in the Food and non-alcoholic beverages Index (+2.13 percentage points).

If taken as a whole, the HICP index shows that annual inflation in January 2023 decreased to 6.8% from 7.3% in December. A year ago, January inflation in Malta stood at 4.1%.

Eurostat data released today also shows that Malta’s January inflation rate was at par with Cyprus. Only Spain and Luxembourg had lower rates at 5.9% and 5.8% respectively.

The euro area annual inflation rate in January was 8.6%, down from 9.2% in December. A year earlier, the rate was 5.1%.

EU annual inflation was 10% in January 2023, down from 10.4% a month earlier. A year earlier, the rate was 5.6%.