Maltese businesses facing ‘constellation of shocks’

Maltese businesses are facing “considerable labour shortages” that could slow down the pace of the island’s economic recovery and a “constellation of shocks” due to rising prices, the Central Bank is reporting. 

Using replies from the European Commission’s monthly business confidence survey, a study by the CBM found that as Malta’s services industry started recovering in the post-COVID year of 2021, concerns about labour shortages became dominant. 

“During the third quarter of 2021, labour again became the major factor limiting output and has exceeded pre-pandemic levels. The latter might reflect the ongoing disruptions to travel and hence the limitation to access foreign labour from non-EU countries,” the Central Bank said. 

Labour shortages were also the main factor limiting production in the manufacturing industry in 2019. 

And while the manufacturing industry generally was not directly affected by business closures during the pandemic, the sharp contraction in global economic activity adversely affected demand for manufactured goods in 2020. 

As the global economy began to recover in 2021, demand recovered sharply. However, supply bottlenecks and disruptions in shipping remained a major concern, and this led to equipment and material shortages in the third quarter of 2021 reaching unprecedented levels and becoming the major factor limiting manufacturing. 

Like the services sector, labour shortages in manufacturing increased sharply again and remain close to the levels experienced before the pandemic. And while labour shortages from non-EU countries also affected the construction industry, since 2020 it is financial constraints that have become the dominant factor limiting building activity.   

Supply chain disruptions in 2021 also gave businesses “a constellation of shocks”, namely delayed delivery times, shortages of important components, and a steep rise in transportation costs. This has been most prevalent in the manufacturing sector. 

Concerns about costs peaked with around 70% of business firms responding to a European Commission business confidence survey, with a smaller net share of 25% saying they intend to raise their selling prices. 

This implies that the share of firms reporting an increase in input prices remained above those who said they will increase selling prices, suggesting the rise in costs will be absorbed in profit margins rather than passed on to customers. 

In view of the rise in supply bottlenecks, labour shortages and input costs, the Central Bank said it expects an increase in the consumer price inflation in 2022, reflecting the impact of higher import price pressures on goods and food. 

It also expected wage growth pressures due to the labour shortages, but said this was only temporary as net migration flows are envisaged to normalise as soon as the pandemic situation improves globally. 

Goods exports were also revised strongly downwards, because some firms within the manufacturing industry are unable to accept orders due to shortages of important components, delays in customs clearance procedures and high transportation costs.