The Central Bank of Malta’s latest business perceptions survey, carried out between January and February, shows an improvement in firms’ expectations about the general economic situation and their own short-term prospects.

The bank yesterday published the first issue of its Quarterly Review for 2006, which analyses economic and financial developments both in Malta and abroad during the fourth quarter of 2005.

The review states that the bank maintained an unchanged monetary policy stance throughout the final quarter of 2005 and during the first quarter of 2006. With the bank’s central intervention rate remaining unchanged at 3.25 per cent, changes in domestic money market interest rates were minimal during the fourth quarter of 2005. They fell slightly during the first two months of 2006.

Meanwhile, in the euro area short-term interest rates rose, with the corresponding premium on the Maltese lira narrowing between September and December, before falling further in February. The lira remained at its ERM II central parity rate of MTL/EUR0.4293 throughout the survey period. In the equity market, the MSE share index rose in the fourth quarter, gaining 26.5 per cent over the previous quarter.

Turning to monetary developments, the review notes that broad money expanded further throughout the quarter under review, driven by growth in domestic credit, primarily by lending to households. Even though the net foreign assets of the banking system increased rapidly, this mainly reflected an injection of share capital into foreign-owned banks, which had no direct effect on monetary growth.

This notwithstanding, the Central Bank of Malta’s net foreign assets continued to increase in the last quarter of the year before following a downward trend in the early part of 2006.

In its assessment of the domestic economy, the review observed that the economy continued to expand during the fourth quarter of 2005. Real GDP grew by 2.8 per cent on a year-on-year basis, from 4.1 per cent in the previous quarter. Inventory accumulation and investment spending were the main contributors to growth, which was dampened by a reduction in government consumption and net exports.

In the manufacturing sector, activity remained subdued, largely due to reduced exports of semiconductors. On the other hand, the number of tourist arrivals, their expenditure as well as the number of nights stayed all increased. Meanwhile, inflation accelerated during the survey period under the impact of rising energy and transport costs. Year-on-year inflation rates, computed on the basis of the Retail Prices Index and the Harmonised Index of Consumer Prices rose to 3.6 per cent and 3.4 per cent, respectively in December. However, going into 2006, inflation eased on both measures.

On the labour front, data obtained from the Labour Force Survey showed that the labour force expanded during the fourth quarter of 2005 as compared to the same period in 2004. The unemployment rate also increased to 7.3 per cent at the end of the period.

In contrast, data on the registered unemployed for November show a small fall in the labour supply on a year earlier, an increase in the gainfully occupied population and a reduction in the unemployment rate to 4.9 per cent.

Turning to the balance of payments, the review notes that the current account deficit widened during the fourth quarter of 2005, reflecting both a larger merchandise trade gap and increased net outflows on the investment income account. These outweighed an increase in net receipts from transfers and a small rise in the surplus on the services account. After excluding movements in official reserves, the balance on the capital and financial account swung into surplus.

The review highlights the Maltese lira’s movements against major currencies. During the December quarter, the lira continued to move in tandem with the euro while depreciating against the US dollar. In terms of the pound sterling and the Japanese yen it strengthened. In the first two months of 2006, however, the lira reversed its course against the dollar and lost ground versus sterling and the yen.

Commenting on fiscal developments, the review reports that during the fourth quarter of 2005 the surplus recorded on the Consolidated Fund was smaller than in the same period of the previous year as expenditure rose more rapidly than revenue. During 2005 as a whole, however, the general government deficit fell from 5.1 per cent of GDP to 3.3 per cent of GDP. Gross general government debt outstanding fell by 1.5 percentage points to 74.7 per cent of GDP at the end of 2005.

The first issue of the Quarterly Review for 2006 is available on the website of the Central Bank of Malta at www.centralbankmalta.com