Malta’s economy showed resilience in the second quarter of 2025, holding broadly steady despite ongoing weakness in retail trade and services activity, according to the latest Economic Update published by the Central Bank of Malta. While overall growth indicators were stable compared to the first quarter, underlying data revealed persistent pressures in consumer-facing sectors that could weigh on momentum in the months ahead.

The Central Bank’s analysis noted that annual GDP growth remained moderate, underpinned by relatively strong performance in manufacturing and the public sector. However, retail sales continued to slide, while services – historically one of the country’s strongest growth engines – registered a further contraction in volume terms. This divergence highlights a growing imbalance across sectors, with tourism-related activity also showing signs of easing after a robust start to the year.

The update showed that industrial production strengthened, aided by improvements in pharmaceuticals and electronics output, which offset softness elsewhere. Construction activity also remained elevated, supported by a healthy pipeline of projects. Meanwhile, labour market conditions were broadly stable, with unemployment holding at low levels, though firms in retail and accommodation reported weaker hiring intentions.

Consumer demand under strain
Retail sales in volume terms fell for the third consecutive month in June, reflecting lower household consumption amid tighter financial conditions. The decline was most pronounced in non-food categories, though food and beverage outlets also reported weaker turnover compared to a year earlier.

The services sector, which includes accommodation, transportation, and professional services, also saw another quarterly decline. While inbound tourism remained above pre-pandemic levels, average spend per visitor has softened, squeezing margins for operators. Professional and business services activity was similarly subdued, according to the report.

The Central Bank attributed some of the softness in consumer-driven sectors to the cumulative impact of higher interest rates, which have dampened disposable income and slowed credit growth. Household sentiment remained below its long-run average, with consumer confidence indicators showing that more families expect their financial situation to worsen in the coming months.

Price pressures and credit conditions easing
On the inflation front, the annual rate of HICP inflation moderated slightly in June, driven largely by a further slowdown in energy and food prices. Core inflation – which excludes energy and unprocessed food – remained more persistent but continued to edge lower, suggesting that underlying price pressures are gradually easing.

Credit conditions also showed signs of loosening, albeit from tight levels. New bank lending to households and businesses increased slightly compared to the previous quarter, reversing some of the weakness seen earlier in the year. Nonetheless, the Central Bank warned that overall credit demand remains subdued, reflecting both softer investment appetite and cautious consumer behaviour.

External environment a key risk
The report highlighted that Malta’s economy remains exposed to external risks, particularly given its openness to global trade and tourism flows. Slower-than-expected growth in the euro area and the possibility of further volatility in energy markets could dampen activity in the second half of the year.

“While headline indicators suggest stability, the divergence between stronger industrial performance and weaker consumer-facing sectors is notable,” the Central Bank said. “If household demand does not recover, the current imbalance could become more entrenched, posing risks to overall growth prospects.”

Fiscal and monetary backdrop
Government expenditure continued to support the economy, with public investment in infrastructure projects remaining robust. However, the Central Bank reiterated the need for fiscal discipline, particularly in light of elevated public debt levels and ongoing structural deficits.

Monetary policy is expected to remain restrictive in the near term, with the European Central Bank signalling that interest rates will be kept at current levels until there is clearer evidence that inflation is on track to return to its 2% target.

Outlook
Looking ahead, the Central Bank expects Malta’s economy to grow at a moderate pace for the rest of 2025, with industrial sectors and public investment providing the main drivers. However, a sustained recovery in retail and services will likely be necessary to ensure balanced and durable growth.

“Malta’s economic fundamentals remain solid, but persistent weakness in key consumer-facing sectors underscores the importance of monitoring household demand and confidence,” the report concluded.