Business conditions level improve in Q3 but remains below – CBM

During the third quarter of 2020 economic activity recovered somewhat as GDP expanded in quarter-on-quarter terms, the Central Bank said today.

In particular, seasonally-adjusted data show that GDP rose by 7.4% during the third quarter, after contracting during the first two quarters of the year. This profile reflects a rebound in private consumption which was up by over a fifth over its second quarter trough.

Although the Review notes that economic activity levels improved during the quarter under review, they nevertheless remained well below pre-pandemic levels. Real GDP fell by 9.9% in annual terms in the third quarter of 2020, which is a more muted decline than that experienced in the second quarter – when GDP had contracted by 16.1%.

The fall in GDP was largely underpinned by a sharp drop in net exports, as the deterioration in domestic demand was smaller. Nominal data on gross value added show that the contraction was primarily driven by the services sector.

Meanwhile potential output growth was at its lowest since 2003, it still remained positive during the third quarter of 2020, at 1.9%. This reflected the continued strength of the labour input, with very little increase in unemployment. The continued divergence between potential growth and developments in the GDP meant that when measured as a four-quarter moving average, the output gap was estimated at -7.2% in the third quarter of 2020, a further widening from the -4.2% estimated in the previous quarter.

The Bank’s Business Conditions Index improved marginally during the quarter under review, but remained firmly below its long-term average. The European Commission’s Economic Sentiment Indicator also remained low from a historical perspective.

While labour market conditions continued to be negatively affected by the pandemic, according to the Labour Force Survey, both the labour force and employment continued to rise on an annual basis during the third quarter.

However, they rose at a slower rate than in the second quarter, resulting in a rise in unemployment. The unemployment rate stood at 4.6%, slightly higher than the 4.4% registered in the second quarter, and 3.7% recorded a year earlier. Nonetheless, the jobless rate in Malta remained well below the euro area average rate of 8.4% and relatively low historically in light of the very sharp contraction in activity.

The Bank said that this reflects the highly supportive government measures and shorter working-time arrangements which mitigate the impact of COVID-19 containment measures on unemployment.