Tourism and service inflation

Last Updated on Thursday, 28 March, 2024 at 10:33 pm by Andre Camilleri

In recent days we had the publication of inbound tourism figures. It provided some interesting food for thought. While the amount of inbound tourists increased by 26%, when compared to January 2023, the number of nights spent decreased by 22% when compared to January 2023. This occurred because the average duration of tourists’ stays in January was slightly under six days, as opposed to slightly over 7.5 days in January 2023. Is this an alarm bell for the supply of bed nights in Malta as various investors have kept investing in new hotels or collection accommodation? However, what is more concerning is the fact that the real average spend per tourist has kept dropping. This stood at €728 in January 2019, €645 in January 2023 (in real terms when adjusted for inflation) and €617 in January of this year (in real terms). Obviously, increasing the number of tourists who spend less per tourist is not the ideal way forward, as we would be suffering the negatives that tourism brings with it, while always benefitting from the positive of tourism at a lower level.

With regards inflation, we know that inflation in the eurozone’s two largest economies has fallen to its lowest level since mid-2021, but service prices remain stubbornly strong, presenting the European Central Bank with a conundrum over when to cut interest rates. Taking the case of Germany – German inflation was 2.7% in the year to February. However, rapid wage growth kept service prices rising at a steady rate of 3.4% in Europe’s largest economy. As we all know, service and wage inflation tend to be resistant to change and are challenging to shape or influence through monetary policy decisions.

A quick look at the annual % increase in wages and salaries in the service industry in Malta and the Euro Area average, one sees that the % increase in wages and salaries in the service industry in Malta were at a higher level than the Euro Area average all the way from 2014 to 2020. However, from the end of 2021 onwards the % increase in wages and salaries in the service industry in Malta was at a lower level than the Euro Area average. I interpret this due to the fact that Malta has been experiencing a very tight labour market as the economy grew rapidly for a number of years, even before the pandemic, leading to an elevated wage growth. Eventually in a post-pandemic world various European countries experienced a tighter labour market and this led to a wage growth at levels higher than Malta. This could mean that going forward attracting foreign workers to come to Malta, especially those of a certain level, will become more difficult. This, furthermore, emphasises the importance of enhancing our productivity level.

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