The Central Bank of Malta’s Business Dialogue 3/2025 report, just published today, provides key insights gathered from 60 interviews conducted with local non-financial corporations (NFCs) between April and June 2025. This exercise collects information on current business conditions, short-term activity expectations, cost and price changes, investment and employment plans, and wage growth expectations. The below article provides key insights as to how businesses in Malta should respond to the challenges they are facing.

1. Main Findings

Overall, business activity in the second quarter of 2025 exhibited varied performance across different sectors of the economy. The share of respondents signalling an expansion in business conditions remained below that of the last three years but improved modestly compared to the previous survey round. Specifically, the net share of businesses reporting improvements in conditions over the three months preceding the interview increased from 15% in the first quarter of 2025 to 22% in the second quarter of 2025.

Sectoral perspective:

• Services Sector: Service-oriented firms continued to experience the strongest performance, with a net 56% reporting an expansion, an increase from 35% in the prior quarter. This positive sentiment was driven by sub-sectors such as maritime and freight operators due to strong international trade flows, passenger travel and transport operators benefiting from high passenger volumes, and gaming companies showing strong performance in both business-to-business and business-to-consumer segments despite regulatory challenges. Accommodation, catering services, and event organisation also experienced growth due to high demand.

• Wholesale and Retail Sector: In contrast, sentiment in the wholesale and retail sector turned negative in the current round, continuing to suggest relatively weak conditions. Sub-sectors dealing in consumer durables and automobiles reported subdued demand, attributing this to cautious spending and intensified competition. Clothing and footwear firms noted a lacklustre turnover due to consumer price sensitivity, while food and beverage sellers faced very challenging conditions due to intense competition. However, some businesses specialising in household goods, appliances, and electronics described more stable activity, although they also reported increased price sensitivity.

• Manufacturing Sector: Fewer manufacturing firms conveyed optimism compared to services, though more firms reported a stabilisation or expansion following a downturn in the previous quarter. Injection moulding firms reported a modest recovery in orders, driven by international demand and resolved supply chain issues. Manufacturers of consumer durables, electronics, and pharmaceutical products reported stable conditions, with pharmaceutical firms noting increased compliance requirements. Domestically oriented food and beverage producers reported stable conditions despite competition concerns, while exporters in this sector noted strong export activity.

• Construction and Real Estate Sector: Demand for property sales and residential letting was reported as resilient by real estate agents, though competition persisted in the commercial space. Construction firms provided mixed signals, with some describing a ‘quiet’ period for commercial and major projects, while services to the construction sector reported positive activity. Firms collectively lamented issues or delays in client payments, causing cashflow constraints.

2. Expectations for Future Activity

Expectations for improved activity diminished slightly, with the net balance of firms anticipating business growth easing to 33% from 35% in the previous quarter. Firms generally continue to expect a further amelioration in business activity while remaining cautiously optimistic amid ongoing uncertainties. This sentiment is tempered by concerns about uncertainty in short-term business conditions due to macroeconomic developments, exposure to volatile markets, the impact of tariffs, currency movements, and consumer purchasing power.

• Wholesale and Retail Sector: This share was negative within the wholesale and retail sector, with firms anticipating flat or decreasing sales in the upcoming quarter. Concerns were rooted in heightened competition, price sensitivity, and an uncertain economic outlook.

• Services Sector: Most companies in the services sector expected sustained activity with modest growth. Service providers were relatively more upbeat than other sectors. Freight and maritime logistics, as well as travel and transport providers, are expected to sustain current activity levels or grow modestly. Hospitality and catering firms expressed cautious optimism for the summer season but noted that last-minute bookings make business less predictable. Gaming companies anticipate modest growth due to stable player engagement and higher business-to-business activity.

• Manufacturing Sector: Companies maintained a generally positive outlook, anticipating higher order volumes and improved business activity, though some also anticipate an unchanged business environment. Expectations remained positive on balance, though less significantly than in services. Firms involved in injection moulding and pharmaceuticals anticipated increased orders.

• Construction and Real Estate Sector: Firms reported a cautiously optimistic outlook, expecting steady output levels and ongoing demand, particularly from first-time buyers. This sentiment was softer than in the first quarter. Real estate agents expected sustained interest in mid-tier and rental properties.

3. Impact of Global Tariffs

Uncertainty emerged as the most prominent theme across all sectors regarding the impact of tariffs, reported by 40% of firms. Many firms struggled to assess the potential impact, citing volatility in US administration announcements, unpredictability of retaliatory measures, and lack of clarity on policy implementation. This uncertainty was particularly pronounced among wholesalers and retailers (60%) and somewhat less widespread among service providers (35%) and manufacturers (41%). This translated into a more cautious business outlook, with many firms adopting a “wait-and-see” approach.

• Direct Exposure: A small number of companies (17%) reported direct exposure to tariffs, typically those with established trade links to the United States or those sourcing critical components from American suppliers. These businesses expressed concern over potential higher input costs and operational disruptions. Companies indicated that the direct impact of the Trump tariffs, though still uncertain, is limited primarily due to Malta’s modest trade exposure to the United States. Based on 2024 data, the estimated effective tariff rate on Maltese exports is lower (7.6% for a 20% tariff or 3.9% for a 10% tariff) because approximately 62% of goods imported by the US from Malta were exempted.

• Indirect Exposure: A larger share of firms (36%) described indirect exposure as their main impact. These firms, while not engaged in direct trade with the United States, anticipate being affected through second-order effects such as global supply chain disruptions, price volatility, or group-level procurement strategies. Some companies noted that their suppliers or parent companies were directly linked with the US, making them vulnerable to upstream cost pressures or logistical delays. Some firms also observed indirect effects stemming from US tariff policy on China, such as increased flexibility from Chinese suppliers and improved cost structures due to a weaker US dollar and lower shipping costs from China. These highlight how trade re-routing can influence local market conditions.

• No Expected Impact: A significant number of firms (33%) reported no expected impact from the tariffs. This was especially common among companies whose operations are confined to the European market or who source inputs from non-US suppliers. Many emphasised well-established supply chains within the EU or neighbouring regions, with transactions conducted in euro, protecting them from currency-related volatility. This sense of insulation was particularly evident in sectors like construction, real estate, and certain service industries with inherently local or regional business models. However, even among these companies, there was an awareness that broader macroeconomic developments could eventually influence their operating environment.

4. Costs and Prices

Cost pressures remained a central theme for Maltese businesses during the second quarter of 2025, although the intensity of these pressures showed signs of easing compared to the previous quarter. The net share of firms reporting an increase in input costs stood at 63%, down from 81% in the first quarter. While this balance seems high, the scale of the increases is mostly small, returning to typical pre-COVID levels. Firms across sectors noted moderate increases in non-labour input costs, particularly for raw materials, maintenance services, and operational expenses like rent and packaging. Transportation costs varied. Non-labour input costs generally increased slightly across sectors like food and beverage, pharmaceuticals, and consumer durables, while electronics and telecommunications noted stable or slightly reduced costs. However, some sectors, including construction and printing, reported more substantial cost hikes. Transportation costs, especially in maritime and freight services, notably increased due to the EU ETS.

Rising labour costs continued to be the most sustained and widespread source of pressure, driven by rising wage demands amid a tight labour market, persistent challenges in attracting and retaining skilled workers, and the need to stay competitive in recruitment.

In response to these cost developments, a significant share of businesses adjusted their selling prices. The net share of businesses raising selling prices stood at 42%, slightly lower than the 48% recorded in the first quarter, suggesting that while cost pass-through remains a common strategy, firms are becoming more cautious in their pricing decisions.

• Sectoral Pricing and Profit Margins: Consumer-facing sectors like hospitality and retail adopted a cautious approach to pricing due to growing customer price sensitivity and intense competition. A similar trend was observed in the manufacturing sector (electronics, pharmaceuticals, packaging), where firms generally refrained from significant price adjustments. Food producers often couldn’t pass on rising costs due to competition, relying on promotions. In the services sector, selling prices increased in catering and consultancy, while tourism saw more restrained adjustments. Gaming companies operated in relatively stable pricing environments. In construction and real estate, selling prices increased modestly to offset rising input costs, often not enough to fully cover expenses, leading to downward pressure on profit margins.

• Profit Margins: The construction and real estate sector mainly reported stable margins. By contrast, around 60% of firms in the wholesale and retail sector reported a decline in profits. Firms in the services and manufacturing sectors reported the most favourable developments, with around 80% reporting stable or higher margins.

5. Investment and Employment Outlook

Plans for additional investment were mentioned less often in the second quarter compared to the previous round. While many firms opted to maintain current levels of investment, a significant portion expressed intentions to increase spending, especially on expansions and digitalisations. The net share of businesses planning to increase investments dropped from 24% in Q1 2025 to 13% in Q2 2025, also reflecting higher uncertainty generated by tariffs which led to a “wait-and-see” attitude. Investment needs continued to be driven by CAPEX, expansions, efficiency improvements, and diversification.

• Investment by Sector: The manufacturing sector continued to have the strongest investment momentum, focusing on CAPEX, energy-efficient technologies, refurbishments, and diversifying offerings. The services sector showed mixed responses, with maritime & freight and travel & transport services focusing on expansions and digitalisation, while gaming and audit firms continued spending on innovation and service quality. Hospitality and catering businesses adopted a more conservative stance, citing large investments in previous periods. Retailers largely indicated a neutral or negative investment outlook, with smaller investments focusing on refurbishments and CAPEX. Construction and real estate development firms expressed a positive investment outlook, with moderate investment in machinery and new materials, though regulatory uncertainty and cost of capital remained limiting factors.

• Financing Strategies: Financing strategies were closely aligned with the type of investment. Firms primarily relying on self-financing typically undertook smaller-scale, routine investments (digitalisation, new technologies, energy efficiency, refurbishments). In contrast, firms planning to expand operations more frequently reported using bank financing or a combination of funding sources for larger commitments.

Responses regarding employment plans indicated a similar pace of job creation to that reported in the first quarter. The net share of firms expected to hire additional staff was 45% in Q2 2025, compared to 46% previously, remaining positive or stable in almost all contacted firms. Employment dynamics remained positive, particularly in sectors pursuing growth and digital transformation.

• Employment by Sector and Challenges: Many firms anticipate modest increases in headcount, however, persistent difficulties in attracting and retaining skilled workers continue to pose significant challenges. The services and construction and real estate sectors remain key drivers of employment growth. The services sector displayed the most dynamic hiring activity, with logistics and maritime firms expanding operational teams, and hospitality businesses recruiting seasonal staff despite ongoing shortages. Gaming, IT, and consultancy firms indicated plans for stable or modest workforce growth. Construction and real estate firms continued to increase headcount due to expansionary plans. Within manufacturing, electronics and injection moulding companies reported plans to expand their workforce. Employment in wholesale and retail is expected to remain broadly stable. Intensifying labour market tightness has led to greater competition for talent. In response, companies are increasingly turning to automation, artificial intelligence, and operational efficiencies to reduce reliance on manual labour.

6. Wage Growth Expectations

A notable shift in wage growth expectations between the first and second quarters of 2025 can be observed, with firms moving to the mid-range section of wage increases. A key development was the sharp rise in the share of firms expecting wage increases in the 4.1-5% range, which grew from 11% to 25% in Q2 2025, making it the most common response. This suggests a consolidation of wage expectations around this mid-range bracket.

• Shifts in Wage Brackets: Expectations for very high wage increases, particularly in the 8.1-10% range, fell sharply from 15% to 0% in Q2 2025, indicating a decrease in wage pressures at the upper end. Smaller declines were also observed in the 6.1-8% (2%) and 3.1-4% (17%) brackets. The share of firms expecting minimal wage increases in the 1.1-2% range rose modestly from 2% to 8%.

• Sectoral Wage Expectations: Manufacturing and services firms were most likely to report moderate wage expectations (3% to 5% range), reflecting sustained demand for skilled and customer-facing workers. Retail firms showed more varied responses, while half of the firms in construction and real estate expected wage growth of around 4-5%. Overall, findings point to more moderate wage expectations clustered around 4-5% in Q2 2025, suggesting that while extreme wage increases are less common, labour cost pressures remain slightly elevated across key sectors.

7. Main Challenges

The exercise identified significant challenges faced by companies across different sectors. At the aggregate level, the most prominent concern was the availability of skilled staff, with 40% of firms expressing such concern. Other highlighted challenges included heightened competition and economic uncertainty. Regulation was cited more often than less common challenges such as finding customers, cost of production, and access to finance, but remained a relatively minor overall concern.

• Sector-Specific Challenges:

    ◦ Manufacturing: The main prevalent difficulties were market instability and competition, with some also noting a decline in demand levels. The availability of skilled staff was a challenge for 29% of companies within this sector.

    ◦ Services: Just under half of the firms contacted identified the availability of skilled labour as their main challenge, while high rent prices were also mentioned as a significant challenge.

    ◦ Wholesale and Retail: Respondents cited ‘other’ competition as the most concerning issue. Finding customers and the availability of skilled staff were identified as major challenges by 20% and 30% of such companies, respectively.

    ◦ Construction and Real Estate: 50% of businesses identified the availability of skilled staff as their primary challenge, followed by other difficulties, most notably, strong competition.

8. Key Actions that Maltese Business Should be Undertaking

Based on the insights into the challenges faced by businesses in Malta, here are some key actions they should consider to overcome the outlined negatives. In light of the detailed analysis of Malta’s business sentiment, which highlights key challenges such as the availability of skilled staff, heightened competition, and economic uncertainty, companies operating in Malta must adopt a multi-faceted and proactive approach.

To effectively address the pervasive concerns regarding the labour market and the consistent upward pressure on costs, businesses should embark on comprehensive strategies for talent development and retention. This entails a significant investment in upskilling and reskilling programs, which equip existing employees with new and enhanced capabilities, thereby making them more versatile and productive within the organisation. Concurrently, it is paramount to cultivate a robust and positive organisational culture, alongside fostering high levels of employee engagement, will serve to significantly improve job satisfaction and, consequently, reduce costly employee turnover. Beyond these measures, businesses MUST also explore avenues for optimizing overall labour efficiency. This could involve making strategic investments in technology adoption, such as automation and digital tools, to streamline operational workflows and lessen reliance on manual labour for repetitive tasks. Furthermore, a diligent process improvement methodology should be applied to analyse existing operations, identify bottlenecks, and implement enhancements that ultimately maximize output per employee.

In navigating the intensified competitive landscape and the prevailing economic uncertainties, particularly evident in sectors like wholesale and retail, differentiation and innovation become critical. Companies must strive to develop novel and distinctive products or services that either cater to previously unmet customer needs or offer a superior value proposition. A strong emphasis on delivering an exceptional customer experience is paramount, as this can build lasting loyalty and effectively set a business apart from its competitors. Additionally, identifying and targeting specific market niches can empower businesses to offer specialised solutions, potentially allowing them to command stronger pricing power and reduce direct competition.

Given the uncertainties stemming from macroeconomic developments, volatile markets, and global tariffs, embracing a proactive and flexible strategic approach is indispensable. This necessitates comprehensive scenario planning, where contingency plans are developed for various economic outcomes, including potential shifts in consumer purchasing power or changes in international trade policies. Diversification, through exploring new markets, expanding into different customer segments, or developing alternative revenue streams, can significantly reduce over-reliance on single income sources. Maintaining financial prudence by ensuring healthy cash reserves and diligently managing debt levels will also provide a crucial buffer against potential economic downturns. It is also vital to continuously monitor and adapt to global influences, which includes strengthening supply chain resilience by diversifying suppliers and building more robust networks to minimise the impact of international disruptions. Furthermore, staying well-informed through diligent market intelligence regarding global economic trends, trade policies, and evolving consumer behaviour is essential for anticipating changes and promptly adjusting business strategies.

Finally, while businesses may currently adopt a “wait-and-see” approach to investment due to tariff uncertainties, strategic capital expenditures remain absolutely crucial for fostering long-term growth. Companies should prioritise investments that clearly demonstrate a high return on investment, such as technology upgrades designed to boost efficiency, or initiatives aimed at improving customer acquisition and retention. Employing a phased investment approach, breaking down larger projects into smaller, manageable stages, can help mitigate risk and preserve flexibility.

When it comes to pricing strategies, the cautious adjustments noted in the report demand a nuanced approach. Businesses should consider implementing value-based pricing models, where products or services are priced according to their perceived value to the customer rather than solely on their production cost, thereby facilitating better margin management. Where appropriate, dynamic pricing strategies that adjust prices based on demand, competitive actions, and prevailing market conditions can also be explored.

Beyond the immediate focus on labour costs, a continuous effort to identify and implement efficiencies in all other operational costs will be fundamental to sustaining and improving profitability. Through the meticulous execution of these integrated strategies, businesses in Malta can significantly enhance their resilience, overcome current obstacles, and foster robust, sustainable growth.