Maltese businesses face persistent labour constraints

The latest Central Bank of Malta Business Dialogue that gathered insights from non-financial corporations (NFCs) between July and September 2025, reveals a landscape of cautiously strengthening business conditions underpinned by robust employment intentions, yet severely constrained by widespread labour shortages and rising operational costs.

Overall business conditions showed a slight improvement in the third quarter of 2025, with the net share of firms reporting improvements rising from 22% to 27%. Crucially, firms reporting expansion outnumbered those experiencing falling activity.

When looking at things on a sector-by-sector basis, this is the overall picture. The Services sector remained the primary driver of positive sentiment, particularly the professional and IT sub-sectors, which reported strong business conditions. Tourism-related services also confirmed improved demand. On the other hand, the Wholesale and Retail sector saw considerable improvement compared to the previous quarter, although it struggled alongside parts of manufacturing due to cost pressures and reduced profit margins. The Manufacturing sector presented a mixed picture, reporting the highest incidence of negative responses among all sectors, although firms focused on printing/packaging and food/beverage generally described stable or moderately improved activity. On the other hand, the Construction and Real Estate sectors reported stable or falling activity, with order books relying primarily on ongoing, rather than new, projects, with no respondent in this sector reporting improving activity in Q3.

Near-term expectations remained positive on balance, although the overall net share anticipating growth moderated slightly, falling from 33% to 27%. Optimism was highest in the services and trade sectors. Expectations turned negative in the construction and real estate sector, where firms anticipated stable or falling activity. The outlook for wholesale and retail turned positive, driven by anticipated seasonal trends like ‘back to school’ and upcoming Black Friday/Christmas shopping.

As a general theme, across all sectors, cost pressures remain a central concern, although their intensity eased slightly, with the net share of firms reporting input cost increases dropping from 63% to 56%. Labour costs continue to be the most persistent and widespread source of pressure, driven by growing wage demands in a tight labour market and struggles to attract and retain skilled workers. Rising import costs and raw materials also impacted manufacturers and hospitality businesses.

In response to costs, the net share of businesses raising selling prices moderated further, standing at 35% compared to 42% in the previous quarter. This suggests firms are becoming more cautious in their pricing decisions and absorbing more costs. This is also constant with feedback per sector that businesses reported on profitability. The Construction and Real Estate sector reported no improvement in mark-ups, while the Wholesale and Retail profitability remained under pressure, with 45% of firms reporting declining mark-ups as they absorbed cost increases. One the other hand the Services sector (25%) and Manufacturing sector (33%) showed more positive outcomes, managing to improve their mark-ups despite challenges.

With regards plans for additional investments, these strengthened significantly in Q3 2025, with the net share planning increases doubling from 13% to 27%. This investment drive is concentrated on capital expenditure (CAPEX), expansions, and refurbishments. Investment expectations improved in the construction/real estate and services sectors, although manufacturing expressed a more negative outlook, citing significant earlier investments. The surge in investment plans (net balance 27%) must be viewed not just as a sign of confidence, but as a survival mechanism against labour shortages, with accelerated investment in digital solutions.

A clear and growing shift towards embedding sustainability into operational plans was observed, with green investments, such as installing solar panels and transitioning to electric vehicles, becoming increasingly important components of firms’ strategies. Nearly half of firms relied on self-financing for routine investments, while larger projects often utilised mixed sources.

Notwithstanding the tight labour market, recruitment expectations have strengthened remarkably, with the net share of businesses aiming to expand their workforce rising to 60% (up from 45% in Q2). This optimism is particularly evident in sectors planning expansions or diversification. Despite this, ongoing recruitment challenges due to persistent labour shortages were highlighted across all industries. Firms are increasingly investing in automation, AI, and technology to boost efficiency and mitigate these difficulties.

Regarding wages, the majority of firms anticipate mid-range increases (4.1-5%). However, strong upward pressures are re-emerging at the higher end of the scale, notably in the construction and real estate sector, where nearly half of firms expected wage increases in the 8.1-10% range.

Labour shortages remain the predominant challenge, identified as the main concern by 40% of interviewed firms. Shortages are restricting firms’ ability to expand operations, forcing some to reject orders or growth opportunities. The difficulties are found across the spectrum, from highly skilled roles (technology, finance, data engineering) to lower-skilled jobs in manufacturing. Construction and real estate face specific issues attracting younger workers to replace those nearing retirement. In response, companies are resorting to “upper tier of the market” salaries, offering additional benefits (health insurance, flexible working hours), and relying heavily on employing third-country nationals (TCNs). Many firms have also expanded recruitment abroad or partnered with offshore agencies.

Initial feedback on the new Malta Labour Migration Policy was varied. While some firms commented that regulation is necessary to improve retention and prevent abuse, others expressed concern that the policy could lead to higher costs, longer waiting times, and increased administrative requirements.

In conclusion, the Q3 2025 Business Dialogue highlights that Maltese businesses are operating in a paradoxical environment: high growth aspiration coupled with severe resource constraints. For businesses navigating this market, the practical implications are clear and require a dual focus on talent management and strategic efficiency investment.

For virtually all sectors, labour costs, driven by chronic shortages and intense competition for skills, are the most persistent operational pressure. Since firms are becoming more cautious in raising selling prices to maintain competitiveness—especially in sectors like wholesale/retail and construction where margins are tight—the ability to pass on these increased labour costs is limited. Practically, this means maintaining profitability will require intensive cost control and efficiency gains rather than relying on price increases. Businesses must budget for salary pressures, particularly in skilled and project-heavy sectors like construction and IT, where upward wage demands are most evident (8.1-10% range).

In my opinion, Maltese businesses need to strategically further focus future capital expenditure on technologies and processes that reduce the need for human input. Similarly, the strong emphasis on green investments (solar panels, energy-efficient equipment) provides a dual benefit: reducing utility expenses and achieving long-term sustainability, thereby indirectly easing pressure on operational costs absorbed by tight margins.

Moreover, given that 40% of firms identify skilled labour shortage as their main challenge, and many rely substantially on Third Country Nationals (TCNs), the Malta Labour Migration Policy presents a critical variable. Businesses must proactively engage with the anticipated increased administrative requirements, potentially higher costs, and longer waiting times associated with TCN permits. This necessitates moving away from short-term reactive hiring towards integrated, towards long-term workforce planning that includes heavy investment in upskilling present staff.

In essence, while the underlying positive sentiment suggests resilience, Maltese businesses are in a race to automate, invest in efficiency, and stabilise their workforce to ensure that current growth aspirations are not curtailed by structural constraints in the labour market.