What is driving cost expectations higher among Maltese businesses?

Businesses in Malta expect their unit costs to continue increasing over the coming year, with labour costs, transportation expenses and geopolitical developments featuring among the factors influencing their expectations, according to the Central Bank of Malta’s fourth edition of the Business Dialogue.

The report examines how firms’ expectations regarding unit costs have evolved since 2022, based on responses to a question about anticipated changes in unit costs over the following 12 months.

Changes in unit cost expectations since 2022

When businesses were first asked about their unit cost expectations in the third quarter of 2022, the most common response was that costs would remain unchanged. This continued until the third quarter of 2023.

In the final quarter of 2023, cost expectations increased amid higher shipping, transit and insurance costs associated with disruptions in the Red Sea, alongside rising wage costs. These pressures continued into the first few quarters of 2024, partly reflecting the extension of the European Union Emissions Trading System to maritime transport.

From that point onwards, firms’ expectations shifted towards cost increases of between 1.1 per cent and 5 per cent.

The share of firms expecting unit costs to increase moderately rose strongly from the third quarter of 2024 throughout 2025.

In 2026, expectations shifted towards more significant increases following the onset of the conflict in the Middle East. Some businesses reported that their cost expectations had become increasingly dependent on geopolitical developments.

In the third quarter of 2026, 19 per cent of the companies interviewed expected unit costs to increase by more than 5 per cent over the following 12 months.

Differences across sectors

The construction and real estate sector recorded the highest proportion of firms expecting unit costs to rise by more than 5 per cent, at 19 per cent.

In the services sector, just under half of the firms interviewed anticipated a significant increase in unit costs of between 3.1 per cent and 5 per cent.

Manufacturing firms most commonly expected a moderate increase of between 1.1 per cent and 3 per cent, with slightly more than half of respondents selecting this category.

Uncertainty about future unit costs was most pronounced among wholesale and retail businesses.

Labour costs and recruitment difficulties

Labour costs were identified as the predominant factor influencing firms’ unit cost expectations in 2026.

The report links this to continued tightness in Malta’s labour market, with persistent labour shortages and recruitment difficulties placing upward pressure on wages. Many firms reported offering higher salaries to attract and retain workers.

The report states that labour demand continues to outpace supply and that labour costs are expected to remain elevated, with little indication of easing.

Geopolitical developments and other cost pressures

The conflict in the Middle East also influenced firms’ cost expectations. Several businesses indicated that a further escalation could exert additional upward pressure on costs.

Firms highlighted the potential impact on fuel prices and the associated increase in transportation costs.

Other factors identified included higher regulatory fees and increases in raw material prices, including copper and memory chips. Some businesses also expected unit costs to follow a similar trajectory to the previous year, with anticipated inflationary increases in certain cases.

Outlook for unit costs

The Central Bank reported that firms’ cost expectations had risen more markedly in recent periods, reflecting labour and non-labour cost pressures alongside geopolitical tensions.

The businesses interviewed continued to anticipate further cost increases over the coming year, with little indication of easing.

The report notes that these expectations may contribute to near-term inflation if firms raise selling prices to preserve their margins. The extent of the impact will depend on their ability to pass higher costs on to customers, which has recently proved challenging in certain sectors.