Looking forward 2024: Inflation will continue to be a headache for consumers and exporters in 2024

It’s a weird time for the economy. The government is paying energy providers to, in effect, cap fuel and electricity prices. Importers of cereal, flour and animal feed are also being helped by government subsidies.

Government is forking out €350 million, but even this hasn’t been enough to fully alleviate the pressure faced by households struggling to maintain their standard of living.

Let’s look at the numbers. In November 2023, the annual rate of inflation as measured by the retail price index was 3.6%, only marginally down from 3.7% the month prior. Food and housing are the main drivers of inflation, registering a whopping 7.5% and 5.7% inflation rate respectively.

And if we look at the forecasts for the years ahead, prices will still increase. The Central Bank’s forecast suggests food inflation will “moderate gradually” to 4.3% next year. Services inflation, driven by restaurants and housing services, should also ease from 5.2% in 2023 to 3.1% in 2024. Meanwhile, imported inflation should moderate as national supply-chain disruptions abate.

Gordon Cordina

Gordon Cordina, an economist, warned that inflation in Malta could drop at a slower pace compared to other countries. But this is very much in line with the fact that inflation tends to rise and fall at slower rates, which is also a sign of stability. “A relatively high inflation rate in Malta as compared to other countries would also reflect the stronger rate of economic growth, and the inevitable smallness and peripherality of our economy,” he said.

“Stability is key to a small and open economy like Malta, and our ability to cushion external shocks is essential,” Cordina said. “Government intervention, where needed should thus continue to focus on sustainable economic growth and on promoting social cohesion.”

JP Fabri, an economic consultant, agreed that inflation is expected to remain elevated and above 2% until late 2025, reflecting tight labour markets and sustained demand pressure. “There is also the risk that the cost-of-living adjustment will be further shifted to the consumer,” he warned.

The Maltese economy doesn’t function in a vacuum. It’s part of a global economy, and is susceptible to external risks brought on by geopolitics and tensions in the international political economy. “Risks to the outlook are tilted to the downside,” Fabri commented. “Externally, downside risks include spill over effects from a possible escalation of Russia’s war in Ukraine or of the Israel-Gaza conflict, especially with implications for global commodity prices. Here, focus needs to be on improving Malta’s productivity performance and competitiveness position.”

As people adjust their spending habits, eyes will be on importers. They have already come under fire for so-called ‘cartel’ practices from people like MEP Alex Agius Saliba, who went to the European Commission asking for a probe into local food importers. Sentiment towards importers might sour further once a new EU-wide carbon tax on shipping comes into effect this January.

This new tax is an extension of the EU’s CO2 emissions trading scheme (ETS) to shipping companies, and Malta is expected to be particularly impacted by the move. The freight cost for a trailer coming from central Europe boarding the Genoa-Malta cargo route is currently around €3,500 and this will increase by around 3% as a result of the ETS surcharge. But road toll charges in Germany and other EU countries coming into force over the coming months could contribute an additional 3% increase.

Farsons CEO Norman Aquilina said Malta needs to keep the pressure on the European Commission to mitigate the impact of the ETS, as it will have significant implications on local logistical costs and overall competitiveness. But beyond the ETS expansion, Aquilina said connectivity will be an equally important factor in 2024. “Having the ability for businesses to efficiently connect, that is, within reasonable shipping transit times, not only in terms of imports, but also exports, remains fundamental,” he said.

However, Aquilina said there needs more perspective on the bigger economic picture. Developments like the expansion of the ETS scheme have an implication on the economy not just on added inflationary pressure but also on our competitiveness as a country. “We operate from a small island economy and are heavily reliant on our ability to trade both from an import and export point of view. Therefore, shipping connectivity, along with the related logistical costs are always key factors impacting our competitiveness,” he said.

In 2024, keeping our eyes on inflation as it impacts consumers may not be enough, it seems.