Business conditions improve, but 86% report higher costs

Maltese businesses reported stronger activity during the second quarter of 2026, with construction and real estate emerging as the best-performing sector, according to the latest Central Bank of Malta Business Dialogue.

The report, based on contacts with 59 businesses between April and June, found that the net balance of businesses reporting improved conditions rose to 41 per cent, from 33 per cent in the previous quarter. Expectations also strengthened, with the net balance anticipating an improvement in activity rising from 42 per cent to 49 per cent.

However, the stronger economic picture was accompanied by a significant rise in costs. The net share of firms reporting higher non-labour input costs jumped to 86 per cent from 68 per cent in the first quarter, with transportation, freight and raw materials among the most frequently cited pressures.

The Central Bank said these increases were often linked to the conflict in the Middle East, while some businesses also pointed to the extension of the EU Emissions Trading System to maritime transport. All construction and real estate firms surveyed reported higher input costs, while manufacturing recorded some of the most pronounced increases.

Selling prices also continued to rise, although at a slower rate than costs. The net balance of firms increasing their prices climbed to 51 per cent from 47 per cent. Around 39 per cent of businesses reported declining mark-ups, suggesting that price increases were frequently insufficient to fully absorb the rise in costs.

Property demand remains strong as construction shows signs of plateauing

Construction and real estate firms provided the most positive assessment of current conditions during the quarter. Suppliers to the construction industry reported improved activity, while demand for property remained high.

Nevertheless, the bank's longer-term analysis of the sector found signs that construction may have reached a plateau, with firms pointing to limited land availability and high land prices as constraints on further expansion. Some businesses said order books were increasingly supported by existing long-term projects rather than new developments.

Real estate presented a stronger picture. Residential sales and rental markets continued to benefit from resilient demand, while constrained supply contributed to higher property prices and rents.

The market has, however, become more buyer-driven, according to respondents, with negotiations taking longer and affordability increasingly shaping purchasing decisions. Some firms said prices in certain areas had risen beyond levels justified by the quality of the properties being offered.

The commercial market was more mixed, with weaker office demand linked partly to hybrid working and an oversupply of office space. Demand for warehouses and garages, by contrast, strengthened.

Recruitment remains positive, but pace slows

Businesses remained willing to recruit, although employment growth expectations weakened significantly. The net share of firms planning to increase employment fell from 60 per cent in the first quarter to 44 per cent in the second.

The decline was recorded across all sectors except construction and real estate. Recruitment difficulties remained widespread and were encouraging businesses to invest in automation, artificial intelligence and other technologies intended to improve efficiency and reduce labour constraints.

Wage pressures also remain significant. Around 64 per cent of respondents expected wage increases of between 2.1 and six per cent in 2026, with the 4.1 to five per cent bracket the most commonly reported.

More than a quarter expected wages to increase by over six per cent, while one in 10 anticipated increases exceeding 10 per cent. Attracting and retaining workers remained the main reason businesses gave for raising wages.

Businesses continue investing despite uncertainty

Investment intentions improved slightly, with the net share of businesses planning to increase investment rising to 27 per cent from 25 per cent.

Capital expenditure, expansion and diversification were among the main areas targeted. Construction and real estate businesses reported plans for major developments, refurbishments and expansion, while some were investing in AI and other efficiency-enhancing technologies.

Services businesses in travel and transport, maritime and freight, professional services and IT also reported plans involving expansion, digitalisation and AI, while manufacturers focused on machinery upgrades, automation and energy-efficient equipment. Almost half of firms said self-financing was their main source of funding.

Despite the positive outlook, businesses continued to flag structural and external challenges. Skilled staff were identified as a primary concern by 35 per cent of firms overall, rising to 42 per cent among services businesses and 43 per cent in construction.

Competition and geopolitical issues were also increasingly cited, alongside difficulties finding customers, access to finance, production costs and regulation.

The Central Bank said firms consistently identified the Middle East conflict as the main downside risk to short-term activity, primarily through its potential impact on shipping and logistics costs, fuel prices and consumer confidence rather than through direct trade exposure.