Cautious optimism across sectors: Business confidence rebounds in Q1 2025, says Central Bank

Business sentiment in Malta has improved in early 2025, with growing optimism among firms despite persistent challenges tied to labour shortages and rising costs, according to the Central Bank of Malta’s latest Business Dialogue Publication.

The publication, based on 54 interviews with non-financial corporations conducted between January and March 2025, reveals that while performance varied across sectors, the overall outlook for the coming months is considerably more positive than in late 2024.

Services lead recovery, but manufacturing stumbles

A net 15 per cent of businesses reported improved activity in Q1 2025, up from nine per cent the previous quarter. The rebound was led by service-oriented firms, particularly in consultancy, hospitality, and entertainment. Continued strong tourism and domestic demand bolstered these sectors, although restaurant operators noted rising customer price sensitivity.

In contrast, the manufacturing sector experienced a weak start to the year. While niche areas such as clothing, footwear, and printing showed resilience, key segments like electronics and pharmaceuticals struggled with reduced demand from trading partners and industry-specific challenges.

Real estate remained resilient, especially in mid-range property, while construction activity was described as stable, having reached a plateau with little room for further expansion.

Retail, meanwhile, delivered a mixed performance. While demand remained healthy for goods such as clothing and heating appliances, food and beverage sales stagnated due to cautious consumer spending.

Brighter expectations despite cost pressures

Looking ahead, a net 35 per cent of firms expect improved conditions in the months to come – a significant rise from the 20 per cent reported in the final quarter of 2024. Optimism is most pronounced in the construction, real estate, and manufacturing sectors, with travel, transport, and hospitality businesses also predicting strong seasonal performance.

Yet, cost pressures remain a major concern. A staggering 81 per cent of firms reported rising input costs – up from 69 per cent the previous quarter – though the rate of increase has moderated. Labour costs, driven by a tight market and growing wage expectations, continue to be the most significant burden.

In response, a growing number of businesses (48 per cent) have raised their selling prices, compared to just 29 per cent previously. However, most price hikes have been modest, particularly in consumer-facing sectors where firms are wary of alienating price-sensitive customers.

Investment and employment outlook

The appetite for investment remains present but has cooled slightly. The net balance of firms planning to invest fell to 24 per cent from 27 per cent previously. While manufacturing and IT firms are continuing to invest in automation, modernisation, and sustainability initiatives, retail investment remains focused on traditional expansions rather than digital strategies.

Self-financing remains the most popular method of funding investment (used by 43 per cent of firms), especially for smaller projects, while 35 per cent use a mix of internal and external funds. Only 11 per cent rely solely on bank loans.

On the employment front, hiring intentions have surged. A net 46 per cent of firms plan to increase staff numbers – nearly double the previous quarter’s 24 per cent. Growth is especially strong in the services and manufacturing sectors, although companies continue to report difficulty finding skilled candidates, particularly in technical roles.

Wage growth and labour market tightness

In 2024, around a third of companies granted wage increases above 5 per cent – a figure expected to rise slightly in 2025. The highest pressures were felt in the services and retail sectors, where demand for talent remains high. In fact, 35 per cent of companies anticipate wage hikes exceeding 5 per cent this year, while the remainder expect smaller increases between 1 and 4 per cent.

Firms in labour-intensive industries are turning to automation and AI tools to ease their dependence on human labour and remain competitive amid wage inflation.

Retail sector under spotlight

A special feature in the report focuses on the retail sector, which continues to grapple with rising operational costs, tighter margins, and aggressive competition – particularly from foreign-owned chains benefitting from tax advantages and economies of scale.

Luxury retail has remained resilient, while mid-tier and budget segments have turned to discounts and promotions to maintain market share. Supermarkets, especially those dominated by international players, are squeezing out smaller local operators, prompting calls for greater policy scrutiny.

Retailers also expressed concern over bureaucratic inefficiencies and the perception of an uneven playing field when competing with foreign-owned businesses operating under Malta’s full imputation and refund system.

Bureaucracy and skills shortage dominate

When asked about major obstacles, 37 per cent of firms cited ‘other challenges’ such as bureaucracy and increased competition, followed by 33 per cent who flagged skilled labour shortages. Demand, regulation, and labour costs were ranked lower in importance but remain relevant concerns.

The services sector, in particular, reported intense competition for talent and limited access to skilled staff, while manufacturers and retailers voiced concern over falling profit margins due to stiff competition and shifting consumer behaviour.