One thing I constantly push family businesses on, is to never stop looking around them. Many family businesses fall into the trap of getting engulfed in their daily operational world and rarely find time to join the dots of what is happening around them and how this will effect their business. As we face less bouyant economic conditions, as we had in previous years, it becomes even more important for family businesses to look around themselves and position themselves according to the evolving business climate.

Within the above outlined context, below please find an overview of the latest economic trends that will likely effect most businesses.

The era of free money has ended. With last week’s interest rate increase from the ECB, the ECB’s deposit rate, which is paid on commercial bank deposits, has now been increase from 3.75% to 4%, which is the highest since the euro was launched in 1999, while the marginal lending facility, which offers overnight credit to banks, was also increased by a quarter-point to 4.75%. This means that yield on bonds are increasing. As per below, a 10-yr Malta govt bond is now yielding close to 4%. This means that rolling over present debt or borrowing new money is to become more expensive. This also means that new projects need to deliver a much higher return as they need to overcome a higher cost of capital.

Another element is that we are now entering a new economic cycle with lower GDP growth on the horizon. The economic sectors that where fuelling mostly economic growth in Malta in 2022 where the ones related to “Wholesale & Retail Trade and Accommodation & Food Services” (+41%) followed by “Information & Communication” (+16%). This clearly indicates that in 2022, GDP growth in Malta was mainly fuelled by a strong increase in private final consumption. This is understandable as many locals and tourists, were spending their accumulated savings during the pandemic. However, things are different when looking at Q1 & Q2 2023. The economic sectors contributing mostly to GDP growth in Malta, are now the “Manufacturing” sector (+17%), followed by “Finance & Insurance” (+14%). This means that in 2023 we are seeing a change in the economic sectors that are mostly fuelling GDP growth, with the economic sectors that are focused on exports taking the lead, whilst internal private final consumption will likely be growing at a much slower pace, likely also as a result of the inflationary period we are going through. This means that those businesses that depend on internal spending need to adapt accordingly as demand for their products and services is likely to dampen.

From a European perspective, a weaker economic growth momentum in the EU is expected to extend to 2024, and the impact of tight monetary policy (increase in interest rates) is set to continue restraining economic activity. Moreover, the overall EU economic growth is being impacted negatively by slowdown in China’s GDP growth to to 0.8% q-o-q in 2023-Q2, from 2.2% in the first quarter. Household spending in China has remained subdued due to relatively poor labour market outcomes, especially for youth, poor investor confidence and low private sector investment, especially in real estate.

This means, that the EU economy has lost momentum. Following a mild contraction in the fourth quarter of 2022, EU real GDP grew by 0.2% q-o-q in the first quarter of 2023 and remained flat in the second quarter, meaning that the EU economy grew by only 0.2% in the first half of 2023. This loss of momentum over the first half of the year was underpinned by the lack of a solid growth driver, with weakness both on the external side and among consumers. Accumulating growth over the first two quarters of 2023 and comparing against the levels of the fourth quarter of 2022, only gross fixed capital formation – mainly equipment investment – and government consumption registered positive, albeit weak, growth in the EU (+0.2% and +0.1%, respectively).

Going forward, survey indicators point to worsening EU economic activity in the third quarter of 2023, with continued weakness in industry and fading momentum in services. In August, the Economic Sentiment Indicator (ESI) continued to decline in both the EU and the euro area. The decline was due to lower confidence among consumers as well as services, retail trade and construction managers.