Wage increases over the last two years were entirely eaten up by rapid inflation, essentially leaving workers worse off in terms of purchasing power and rendering average real wages stagnant since 2018, according to a new report.

In its March economic outlook report for Malta, consultancy and audit firm KPMG said inflation is expected to go down from last year’s 5.6% to 2.9% this year while unemployment will increase slightly in the next two years, partly due to skill shortages.

The firm, which is part of the accountancy world’s big four, said wages in Malta increased by 1.5% in nominal terms last year – the lowest rise in the EU. Meanwhile, inflation jumped by 5.6%. “The real effect on people’s purchasing power for 2023 is expected to be negative, as growth in prices outpaced growth in nominal income,” it said, adding that real wages have essentially remained the same since 2018.

Wages climbed nominally from an average of €18,967 in 2018 to €22,032 in 2023, it said, but due to the fact that prices outgrew income, the real average wage of a worker was essentially €18,254 in 2018 and just €18,359 in 2023.

In simple terms, this means that in 2022, workers earned on average €20,953 with this increasing to €22,032 in 2023; however, slightly more than the increase of €1,079 was eaten away by rising prices, leaving workers worse off in terms of purchasing power.

The firm said prices of food and non-alcoholic beverages went up the sharpest – by 9.5% in December 2023 and by a further 10.4% in January 2024.

The report commended the government’s food and energy subsidies but shed doubt on their sustainability. Perhaps policy should focus more on enhancing productivity, it suggested, “ensuring businesses have the latitude to offer higher compensation packages in line with increased productivity and value creation”.

Price hikes brought about by inflation ate away all observed wage growth, consequently decreasing real wage growth further. Graph: KPMG

The inflation rate will decrease drastically this year and is expected to return to the EU’s target rate of close to 2% by 2026. But close attention needs to be paid to when government cuts back on energy subsidies, which have so far kept inflation way lower than it could have been.

Another factor which could potentially impact inflation is the withdrawal of the government’s incentive to reduce prices of 400 essential food items by at least 15%, which is expected to run until October. The firm raised concerns over the “potential consequences of withdrawing the incentive, considering its significant impact and broader implications for food price controls”.

Despite registering a further drop in an already low unemployment rate, the Labour market “grapples with persistent challenges of manpower scarcity and skill deficits, posing hurdles for businesses in retaining staff and filling open positions”.

Last September, more people were terminated from employment than the number engaged, the report found, reversing a positive trend in the previous two months.

Unemployment is still projected to remain stable at 2.6% this year and comparatively low for the foreseeable future, but “there is a slight anticipated increase” in the next two years, possibly reaching 2.9% in 2026.

“This uptick may be partly attributed to ongoing skill shortages and mismatches in the labour market,” the firm said.

‘Half foreign workers leave within a year’

The report also highlighted issues with foreign workers. While they are essential to the economy, they pose challenges, it said.

One issue is their typically short stays.

“A quarter arrive for temporary employment and half leave within a year, as such disrupting employment dynamics,” it said.

This dynamic risks impeding employer investment in their training, exacerbating labour shortages and compromising workforce quality.

Property deeds and permits down by 15%

In 2023, residential permits decreased by 15% over the previous year, and so did commercial permits.

Similarly, in 2023 there were 15% fewer final property deeds signed compared to the previous year, and the combined value of last year’s deeds was 8% lower than 2022.

January this year, however, saw more than a 2% increase in deeds compared to the same month last year.

Property was also sold for higher prices last year over the previous year. In December 2023, the average value of final deeds was €225,292, almost 10% more than the same month the previous year, and by January this year, the value of final deeds increased by 5.6% when compared to January last year.

January this year also saw a 25% increase in promise of sale agreements for residential properties compared to the same month last year.

Most permits in Sliema, Gżira, Birkirkara and Gozo regions

The Northern Harbour region – which includes densely populated localities like Sliema, Gżira and Birkirkara – had the highest number of residential permits, followed by the Northern region and Gozo, “indicating a growing interest in residential property development in the sister island”.

The fewest permits were recorded in the western region.

The firm also said the economy has relatively stabilised after the pandemic and grew by 4.3% in real terms during the last quarter of 2023.

Its total gross value added expanded by 5.7% between 2022 and 2023, with the construction sector experiencing the greatest decline in growth. The downturn was closely followed by the wholesale and retail sector, the firm said.

On the other hand, tourism sectors recovered significantly from the pandemic. Accommodation and food services grew by 18.5% last year, an “upward trend paralleled by the surge in inbound tourism, with over 2.9 million visitors recorded last year”.