The Malta Fiscal Advisory Council (MFAC) recently published its assessment of the macroeconomic forecasts underlying the Annual Progress Report 2025 (APR 25).
This report provides critical insights into Malta’s economic trajectory, highlighting the challenges and opportunities that lie ahead. The analysis underscores the need for a strategic policy shift to ensure long-term economic sustainability, particularly in light of recent trends in domestic demand, labour productivity and unit labour costs (ULCs).
In recent years, the engine of economic growth in Malta has been predominantly driven by domestic demand. This growth has been significantly underpinned by rapid increases in labour supply. The country’s population has even surpassed the EUROPOP2023 projections previously set for 2026 and is expected to continue to grow, highlighting the central role of demographic factors in driving economic momentum.
Against this backdrop of population growth and demographic influence, the MFAC underscores the critical importance of a strategic policy shift towards an export-led growth model. This shift is deemed necessary to enhance long-term economic sustainability. While demographic growth has played a role, relying on demographic pressures as a primary driver of economic growth will continue intensifying strains on infrastructure, public services and natural resources.
Despite the robust performance of the Maltese economy, which has been outpacing that of the broader EU, a significant challenge has emerged concerning productivity. Substantial increases were observed in compensation per employee, rising by an average rate of 4.5% over the past three years. However, while the strong economy facilitated these wage dynamics, these developments have not been matched by corresponding gains in labour productivity, which has remained stagnant over the past three years. This imbalance between rising wages and stagnant productivity has resulted in a sharp increase in nominal ULCs.
Looking ahead, this trend of sharply increased nominal ULCs is expected to persist in 2025. Labour productivity is anticipated to remain unchanged, while compensation per employee is projected to rise by a further 5%. Consequently, ULCs are also expected to increase. Such sustained increases in ULCs pose a significant risk, as they could erode the country’s capability to maintain its export market share against competitors.
Ensuring the sustainability of economic growth over the short- to medium-term will therefore necessitate a renewed policy emphasis on strengthening competitiveness. This strengthening must be achieved primarily through productivity enhancements. This requires a fundamental strategic shift towards higher value-added activities. This shift includes the transformation and upgrading of existing economic sectors. The MFAC specifically highlights that the tourism sector stands to benefit from a recalibrated approach that prioritises quality over volume, aligning with broader objectives of economic and environmental sustainability.
In this context of addressing the risks from demographic pressures and strengthening competitiveness, the Council reiterates the importance of intensifying efforts to boost productivity. This can be achieved through comprehensive structural reforms. Key areas for these reforms include:
- Addressing skills mismatches through targeted educational and vocational initiatives;
- Fostering innovation and research; and
- Accelerating the dual transitions towards digitalisation and environmentally sustainable business practices.
These comprehensive reforms are seen as crucial steps to move Malta towards a more sustainable, export-led growth model underpinned by enhanced productivity, mitigating the risks associated with over-reliance on demographic expansion and rising unit labour costs.
The MFAC’s assessment of the macroeconomic forecasts underlying the APR25 provides a clear roadmap for Malta’s economic future. While domestic demand has been a key driver of growth, the country must now pivot towards an export-led model to ensure long-term sustainability. This requires a renewed focus on competitiveness, productivity enhancements and structural reforms.
By addressing skills mismatches, fostering innovation, accelerating digitalisation and embracing sustainability, Malta can position itself as a competitive player in the global economy. Additionally, recalibrating the tourism sector to prioritise quality over volume will further strengthen the country’s economic and environmental resilience. The challenges ahead are significant, but with strategic policy interventions and a commitment to sustainable growth, Malta can overcome these obstacles and build a prosperous future for its citizens. The MFAC’s recommendations should serve as a valuable guide for policymakers, businesses and all stakeholders as they work together to shape the country’s economic trajectory.
