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THE latest Central Bank of Mal- ta publications offer another reassuring snapshot of an econ- omy that continues to perform strongly in a difficult interna- tional environment. Real GDP expanded by 3.9% in the first quarter of 2026, the labour market remained tight, consumer confidence moved close to historic highs and in- flation eased to 2% by June. At a time when the euro area con- tracted during the first quarter and remains burdened by geopo- litical uncertainty, higher energy prices and weak competitive- ness, Malta's continued resil- ience should not be understated. Yet the real story lies in what is driving growth, where capital is flowing and whether today's expansion is strengthening the foundations for tomorrow's prosperity. The first striking feature is the growing weight of domes- tic demand. In the first quarter, domestic demand increased by 4.5% and accounted for 3.6 percentage points of the 3.9% increase in GDP. Private con- sumption contributed 1.6 points, while government consumption added another 1.5 points. Once the import content of expend- iture is considered, private and government consumption re- mained the largest domestic contributors. This tells us that Malta's economy is increasing- ly being sustained by spending within the country rather than by a decisive improvement in ex- ternal competitiveness. There is nothing inherently problematic about consump- tion supporting growth. Strong household spending reflects employment, income and confi- dence. The Central Bank's July update shows consumer senti- ment around historic highs, with households becoming more op- timistic about both the general economy and their own financial position. That confidence is it- self an economic asset because it encourages spending and in- vestment rather than precau- tionary retrenchment. However, consumption is best understood as the outcome of productive ca- pacity accumulated in the past. It can sustain momentum, but it cannot by itself determine the economy's future potential. The longer-term question is whether today's expenditure is being ac- companied by investment that raises what Malta can produce tomorrow. Government consumption de- serves particular attention. It rose by 8.5% in the first quarter, more than double the 4% in- crease recorded in the previous quarter. The Central Bank attrib- utes much of this acceleration to intermediate consumption in residential care and healthcare. This expenditure meets real social needs, particularly in a growing and ageing population, and it directly supports econom- ic activity. Yet it also reinforces a point raised in recent debates about the quality of public spending. Operational expend- iture can improve services and support demand, but unless it is matched by stronger productive investment, it risks expanding the cost base of the state without sufficiently increasing the coun- try's future capacity. Investment did recover, with real gross fixed capital formation rising by 3.6%. The composition, however, is revealing. Growth was driven mainly by intellectual property products and non-res- idential construction, while in- vestment in dwellings, machin- ery and equipment declined. The increase in intellectual property is encouraging because it may signal activity in knowledge-in- tensive sectors. The weakness in machinery and equipment is less comforting, since such invest- ment is closely associated with technological adoption, produc- tive capacity and efficiency with- in firms. Overall, investment contributed only 0.6 percentage points to growth, considerably less than the combined contri- bution from private and govern- ment consumption. The production side of the economy tells a similarly nu- anced story. The largest con- tribution to output came from wholesale and retail trade, trans- port and storage, accommoda- tion and food services. Services production strengthened, with growth in real estate, hospital- ity, administrative support, in- formation and communication, and transport. Manufacturing output, by contrast, rose only marginally in the first quarter before industrial growth mod- erated further in May. Certain advanced subsectors, including electronics, optical products and pharmaceuticals, performed well, but the overall picture con- tinues to be one in which servic- es associated with consumption, property, tourism and popula- tion growth remain central. Tourism provides perhaps the clearest illustration of the ten- sion between volume and value. Tourist expenditure increased by 15.5% in May, which on the surface appears exceptional. In the first quarter, arrivals rose by 16.3% to more than 806,000 and total nights increased by almost 12%, but the average stay short- ened. The tourism economy is therefore continuing to expand primarily by attracting more people. This is not simply a tourism issue. It reflects the broader de- velopment model. Malta has repeatedly demonstrated that it can create additional activi- ty through more workers, more residents, more visitors, more transactions and more con- struction. That model has gen- erated employment, tax revenue and significant improvements in household incomes. Its lim- its emerge when the addition- al volume places pressure on infrastructure, public services, housing and the environment without producing a proportion- ate improvement in productivity or value added. Growth remains real, but the marginal cost of sustaining it begins to rise. The labour market reinforc- es this interpretation. Activity and employment rates contin- ued to increase, unemployment remained very low at 3.5%, and both vacancies and the vacancy rate rose from a year earlier. This remains a considerable strength. However, a tight labour market is no longer merely evidence of success; it is also a signal that the extensive source of growth is becoming harder to sustain. Po- tential output expanded by 4.4%, yet the continued dependence on additional employment rais- es the question of how much of that potential is being generated through productivity and how much through the continued ex- pansion of labour inputs. The income data add another layer. Compensation of employ- ees made the largest contribu- tion to nominal GDP growth, while unit labour costs were the principal driver of the 3% increase in the GDP deflator. Slower growth in compensa- tion per employee meant unit labour costs rose less rapidly than before, but the basic com- petitiveness challenge remains. Wages must rise if economic progress is to translate into bet- ter living standards, yet durable wage growth must eventually be financed by higher productivi- ty. Otherwise, increased labour costs are absorbed through high- er prices, reduced profitability or weakened competitiveness. Malta's external position re- mains strong, with the current account surplus equivalent to 8% of GDP over the year to March. This provides an important buff- er and distinguishes Malta from many economies with persistent external deficits. Yet the quar- terly surplus declined by more than €100 million from a year earlier, largely because net re- ceipts from services weakened. A healthy current account should therefore not obscure shifts within the external economy. Malta remains a successful ex- porter of services, but the declin- ing quarterly surplus and slower contribution from net exports underline why productivity and competitiveness cannot remain secondary concerns. Perhaps the most consequen- tial signal in the reports relates to credit allocation. Lending to non-financial companies was growing by 13.4% in May, which appears encouraging. However, the expansion was led mainly by lending to construction and real estate, followed by accommoda- tion and food services. Lending to manufacturing declined in annual terms. Household lend- ing grew by almost 10%, with mortgage credit remaining the dominant component. Banks are not behaving irra- tionally. Property-backed lend- ing provides visible collateral, familiar risk profiles and strong historical returns. Construction, hospitality and real estate also respond to genuine demand. Yet credit allocation does more than finance the economy; it shapes it. When the financial system con- sistently directs capital towards existing assets and volume-driv- en sectors, it reinforces the very model whose constraints are becoming increasingly visible. The issue is whether sufficiently patient and risk-tolerant capi- tal is also reaching technology adoption, export-oriented firms, research, industrial upgrading and businesses capable of raising productivity. The property market itself re- mains robust. Residential per- mits increased, final deeds were higher and mortgage growth remained strong, even as prom- ise-of-sale agreements softened. Once again, this demonstrates resilience, but also the econ- omy's continued gravitational pull towards property. Unless alternative productive activities become more attractive and fi- nanceable, exhortations to in- novate will struggle to compete with the certainty offered by land and buildings. Taken together, the reports de- scribe an economy that is strong but not yet transformed. The next chapter cannot be built by rejecting these sectors or diminishing their contribu- tion. It must be built by using the resources they generate to finance transition. That means converting fiscal revenues in- to productive infrastructure, converting strong bank balance sheets into broader business in- vestment, converting migration into a more sophisticated skills strategy and converting eco- nomic confidence into a willing- ness to undertake reforms whose returns will not be immediate. The numbers do not suggest an impending crisis. They sug- gest something more subtle—a country approaching the point at which continued success de- pends on changing the composi- tion of success itself. The econ- omy continues to grow, but the question demanding greater at- tention is whether its productive foundations are growing with it. 15 maltatoday | SUNDAY • 9 AUGUST 2026 OPINION There is nothing inherently problematic about consumption supporting growth. Strong household spending reflects employment, income and confidence. JP Fabri Malta's economy is still growing. But how? Economist