Insights gathered by the Central Bank of Malta through interviews with non-financial corporations (NFCs) between January and March 2025 reveal a varied economic performance across sectors, with businesses grappling with persistent challenges while maintaining a degree of cautious optimism for the future.
Overall business activity showed a modest improvement in the first quarter of 2025 compared to the previous survey, although conditions remained below those experienced in the preceding three years.
The services sector reported the most positive assessment of recent activity, particularly firms in audit and consultancy, catering and entertainment, and hospitality. These businesses continued to thrive, benefiting from strong domestic and international demand, notably supported by robust growth in tourist arrivals and spending on leisure and hospitality. The retail sector also saw an overall improvement in activity. The construction sector remains stable, having potentially reached its peak. Real estate agents continue to report resilient demand in property sales and letting.
Looking ahead, business expectations are notably more favourable, with the net balance of businesses expecting an improvement in activity rising significantly to 35% in Q1 2025 from 20% in the previous quarter. This positive shift in outlook was observed across almost all sectors, barring wholesale and retail. The construction and real estate sector exhibited the most favourable outlook, followed by the manufacturing sector. Most services firms anticipate continued growth driven by local and foreign demand. Employment prospects also remain positive overall, with plans for job creation accelerating. The net share of businesses planning to increase employment levels rose sharply from 24% to 46%. The services sector, including personnel outsourcing and gaming firms, is expected to be a significant driver of this growth. Manufacturing firms also plan to increase employment as they invest in expansion and technology.
Despite signs of improvement and positive expectations, Maltese businesses face widespread challenges. Rising input costs continue to be a major concern, with a net 81% of interviewed firms reporting increases, up from 69% previously. While the rate of these increases is more muted than in prior periods, returning closer to pre-COVID levels, the pressure is still significant. The most significant pressure point is labour costs, driven by a tight job market and increasing wage demands. Other rising costs include certain food and beverage items, raw materials like reinforcement materials and wood, equipment parts, maintenance and engineering services, administration fees, technology, and transport.
These rising costs have led to a substantial increase in the share of firms raising selling prices, with the net share jumping from 29% to 48%. However, in consumer-facing sectors like hospitality and retail, firms are reluctant to implement aggressive price hikes due to increasing customer price sensitivity, opting for more modest adjustments. This sensitivity was noted by restaurateurs, with customers opting for lower-priced menu items and in the retail sector where consumers are becoming more price sensitive regarding food and beverage sales.
Consequently, profitability and mark-ups are under pressure. 46% of firms indicated that their mark-ups have been negatively impacted by rising input and operational costs, particularly pronounced in the wholesale/retail (57%) and manufacturing (56%) sectors. Only a small percentage (9%) managed to increase their mark-ups. Competition also limits the ability of companies to pass on costs, leading to compressed mark-ups, especially in highly competitive sectors.
Skilled labour shortages, increased competition, and bureaucratic inefficiencies are highlighted as key widespread concerns across sectors. Skilled staff availability was cited as the main concern by 33% of respondents overall and by nearly half of services firms. Competition and market saturation, leading to low margins, were cited by wholesale and retail firms. Domestic retailers are particularly concerned about increased competition and advantageous tax treatments for foreign-owned companies. Bureaucracy and regulation are also significant difficulties, especially in the construction and real estate sector.
In contrast to the services sector’s positive performance, the manufacturing sector reported a deterioration in activity in this round, with sub-sectors like electronics, pharmaceuticals, and food and beverage production facing a slow start to the year. This is attributed to weak economic performance by trading partners, poor conditions in the automotive industry, cautious customer spending, environmental regulations, and weaker business confidence.
While cautiously optimistic, businesses remain aware of ongoing uncertainties. Some firms expressed concern that short-term conditions could be severely impacted by external risks such as tariffs, currency movements, and consumer purchasing power
In response to the persistent challenge of labour market tightness and competition for talent, companies are increasingly exploring automation and artificial intelligence to reduce dependence on physical labour. Despite increased wage offers, labour shortages remain a significant impediment.
Investment plans show a slight moderation, with the net balance planning to increase investment falling slightly to 24%. Investment needs are focused on modernisation, expansions, and efficiency improvements. The manufacturing sector continues to be heavily investment-driven, focusing on expansion, automation, and R&D. The services sector is investing in IT upgrades and facility improvements. Retail investment remains more traditional, prioritising physical store expansion. Self-financing remains the preferred method for most firms (43%), particularly for smaller, routine investments, while larger projects often utilise a mixture of funding sources, including bank financing.
Wage growth expectations for 2025 are broadly similar to 2024, with 35% of firms anticipating increases above 5%. Labour-intensive sectors like services and retail continue to face strong wage pressures due to shortages and competition. Some firms anticipate ongoing workforce challenges in the year ahead.
In conclusion, the first quarter of 2025 paints a picture of a Maltese business environment marked by resilience in the services sector and a more positive outlook for activity generally. However, this optimism is tempered by persistent challenges related to rising input costs, significant labour shortages driving up wages and increased competition. Businesses are responding by adjusting pricing strategies (though limited by customer sensitivity), exploring efficiency gains, and investing in technology to mitigate labour dependency. The more important underlying message is that the ability of businesses to innovate and manage costs efficiently will be critical for success in this evolving landscape.
