The recent economic update issued by the Central Bank (9/2025) presents a detailed picture of the Maltese economy, offering both encouragement from sustained business health and caution regarding persistent uncertainties and cost pressures.

Overall, the Bank’s Business Conditions Index (BCI) indicates that the annual growth in business activity stood slightly higher than the previous month and remains around its long-term average, estimated since January 2000. This stability in the BCI, a metric which suggests business conditions are consistent with a real GDP growth rate of close to 4%, managed to offset a moderation in GDP growth observed recently below its long-run average. Correspondingly, the broader Economic Sentiment Indicator (ESI) for Malta rose to 103.5 in August, surpassing its long-term average (estimated since November 2002) and improving significantly from 97.3 in July.

While sentiment is generally positive, the business environment is marked by heightened unpredictability. The CBM’s Economic Policy Uncertainty (EPU) Index, though declining to 112.8 in August from 145.3 in July, stubbornly remained above its historical average, indicating higher than normal economic policy uncertainty. This index was primarily influenced by significant domestic factors, including the publicly announced closure of the Carlo Gavazzi factory, ongoing discussions surrounding the Planning Reform Bill, and recent developments within the Maltese political landscape. Internationally, discourse on general economic sentiment and, specifically, US trade policy also contributed to this elevated uncertainty.

Furthermore, the Economic Uncertainty Indicator (EUI), which measures how difficult it is for businesses and consumers to make predictions, actually increased further to 24.0 in August from 13.5 in July, signalling greater difficulty in planning financial and business decisions. Notably, the services sector recorded the largest increase in uncertainty, accounting for most of the overall uncertainty observed in August.

The overall rise in the Economic Sentiment Indicator (ESI) was chiefly driven by the services sector and consumers. The services confidence indicator surged to 26.1 in August from a mere 1.4 a month prior, climbing well above its long-term average of 19.4. This reflected a significant improvement in firms’ assessment of both the business situation and demand over the past three months, with demand expectations also improving, albeit to a lesser extent. Similarly, the retail trade confidence indicator rose to 4.4, moving back above its long-term average of 0.1, mainly due to an improved outlook for business activity over the subsequent three months and a net decrease in the share of respondents assessing stocks of finished goods to be above normal.

In contrast, the industrial sector confidence remained cautious at -6.0 in August, falling marginally below its long-term average of -4.4. This slight deterioration was attributed to a decline in production expectations, even though order-book levels were assessed as less negative than before. Meanwhile, the construction sector saw a further decrease in confidence, falling to -10.4 and below its long-term average of -7.2, as significantly more respondents assessed their overall order books to be below normal. Business owners should note that sentiment data for this sector is to be interpreted with caution due to a low response rate among enterprises.

Looking at July’s activity, the volume of retail trade grew by 4.7% year-on-year, but this marked a slower pace compared to the 6.9% increase in June. The index of industrial production also saw its annual growth rate slow to 4.0% in July from 6.4% in June, primarily reflecting an easing in manufacturing sector growth to 3.9%. Despite this overall slowdown, several manufacturing sub-sectors reported robust performance, including double-digit growth rates among firms producing textiles, motor vehicles, trailers and semi-trailers, furniture, computer, electronic and optical products, basic pharmaceuticals, beverages, and those involved in the repair and installation of machinery and equipment. However, this was countered by marked declines in the output of non-metallic mineral products, electrical equipment, wood products, and the ‘other manufacturing’ sector (which includes medical and dental instruments). Separately, the energy sector’s production increased by an annual 5.0%, accelerating from the 3.6% growth recorded in June.

Of particular note, the index of services production continued its annual contraction trend since February 2025, declining by 3.2% in June. Production fell in key service areas such as administrative and support services, information and communication, real estate activities, and professional, scientific and technical activities, though these declines were partially offset by increases in transportation and storage and accommodation and food service activities.

On the other hand, the labour market remains extremely tight, with the seasonally-adjusted unemployment rate maintaining a historical low of 2.6% for the fourth consecutive month, down from 3.0% a year earlier. This tightness is reflected in the Jobsplus data for June, where the level of net engagements stood at 3,153, up from 2,685 a year earlier, with total engagements at 11,335 and terminations at 8,182.

However, the Employment Expectations Indicator (EEI) decreased to 96.5 in August and remained below its long-term average, with the latest decline largely driven by lower hiring expectations in the industrial and retail sectors.

Compounding the pressure from the tight labour market are inflationary costs. The overall annual HICP inflation rose to 2.7% in August and, critically, stood 0.7 percentage points above the euro area average of 2.0%. The Retail Price Index (RPI) inflation also increased to 2.7%. Core inflation (HICP excluding energy and food) stood at 2.7%, also above the euro area average. Food inflation rose to 3.7%, mainly due to unprocessed food inflation reaching 5.7% (reflecting higher prices for fruits and vegetables), while services inflation slightly increased to 3.3%, driven by higher prices in recreation, personal care, package holidays, and accommodation. Furthermore, Non-Energy Industrial Goods (NEIG) inflation increased to 1.5% due to higher prices for durable and semi-durable goods. The persistent zero energy inflation is primarily due to ongoing government measures.

For businesses planning capital expenditure, the annual growth of credit increased in July, providing a favourable financing environment.

The property sector shows mixed but active signals: in July, 431 commercial building permits were issued, which is 182 more than the same month in 2024. Simultaneously, 1,047 new residential permits were issued, representing a year-on-year increase of 576. Furthermore, August saw increases compared to a year earlier in both residential promise-of-sale agreements (1,052) and final deeds of sale (1,020).

Finally, the Consolidated Fund registered a deficit in July, contrasting with the surplus a year earlier, a result of declining government revenue and a strong rise in government expenditure.

On the trade front, the merchandise trade deficit increased to €904.0 million in July due to a rise in imports and a drop in exports. When excluding large, specific chapters like fuels and aircraft, the trade deficit still widened, primarily due to lower exports of printed material, electrical machinery, and pharmaceutical products

In conclusion, the economic climate in Malta offers opportunities. However, family businesses and SMEs are advised to balance optimism with caution. I would therefore advise the following:-

• Prioritise Resilience: Budget for prolonged policy uncertainty and potential cost increases due to inflation and increasing wage cost pressures

• Focus on Efficiency: Invest in process improvements to mitigate the challenges of the persistently tight labour market.

• Capitalise on Demand: Utilise the favourable credit environment to invest strategically in sectors showing strong demand, especially retail and services.