Malta Economic Forecast

Activity was likely healthy in Q2. The unemployment rate dropped through June to the lowest in the Eurozone. Moreover, tourist arrivals continued to expand robustly year on year in the quarter—albeit at a slower pace than in Q1. That said, economic sentiment lost substantial ground in May–June, while higher interest rates and declining but still-elevated inflation in the quarter will have weighed on the economy. Moving to the current quarter, July’s further decline in inflation and rebound in economic sentiment, coupled with a strong tourism season, suggest resilient activity. Looking at the first seven months of 2023, data for January–July shows the budget recorded a narrower deficit compared to the same period of last year, mainly on the back of substantial increases in revenue from income and value-added taxes, further reinforcing the image of resilient activity in the year so far.

Harmonized inflation fell to 5.6% in July from 6.2% in June, mainly due to softer increases in prices for food and non-alcoholic beverages plus recreation and culture. Inflation should continue its downtrend ahead amid higher interest rates and softer domestic demand. A wage-price spiral and commodity price spikes are upside risks.