Italian heatwaves, droughts drive inflation in Malta

Malta’s climate debate often focuses on rising temperatures but a new Central Bank of Malta study suggests the most significant economic risks may be imported from Italy.

Italy is a key trading partner for Malta and according to Senior Research Economist Theodossios Drossidis, the deep integration between both countries creates a “climate bridge”.

Heatwaves, droughts and other weather shocks in Italy cross this bridge and are rapidly transmitted into domestic prices, production and energy dynamics.

The research titled, Short-run Spill Over Effects of Climate Shocks to Small-open Economies: An Empirical Investigation, stresses that Malta’s exposure stems from structural dependence. Italy accounts for between 41% and 56% of Malta’s total food imports, and up to 60% of agricultural and hunting products. On the energy side, Malta’s electricity and gas supply is almost entirely tied to Italy through the interconnector, reinforcing the scale of exposure.

Heat, inflation and the price of summer shocks

The findings show that positive temperature anomalies in Italy—especially during summer—are a major driver of inflation in Malta. These heat shocks increase production costs and energy demand in Italy, which then feed into Maltese import prices and services inflation.

In some cases, Maltese services inflation, particularly in catering and accommodation, is found to “overshoot” Italian inflation itself. The report links this to Malta’s reliance on imported food and energy inputs in tourism-facing sectors.

The study finds that negative precipitation shocks—drought conditions during key harvest periods—have sharp and immediate effects on Malta’s food sector.

Italian processed food inflation can rise by as much as 0.66 percentage points following such shocks. Maltese processed food prices closely mirror these increases, reflecting high import dependence.

Given Italy’s dominant role in Malta’s food supply chain, the report notes that these shocks are not marginal but structurally embedded in domestic price formation.

Beyond prices, the spill over effects extends into real economic activity. The study identifies a peak median drop of 0.63 percentage points in Maltese food manufacturing output following winter temperature anomalies in Italy, typically emerging about two months after the initial shock. 

This highlights that climate disturbances abroad do not only affect inflation, but also production cycles in Malta’s manufacturing sector.

Energy: volatility abroad, buffer at home

Energy transmission is also more complex. Italian climate shocks can generate swings of up to 1.44 percentage points in energy production, reflecting volatility in supply conditions.

The Malta-Sicily interconnector also creates a “climate bridge” that allows weather-driven shocks in Italy to manifest as economic pressures in Malta production. 

When climate shocks cause Italian energy production to fall (particularly in colder months), Maltese domestic production often rises to offset these foreign fluctuations

However, the study finds that Maltese consumers are partly shielded through government subsidies, which dampen direct price transmission. At the same time, domestic energy production tends to adjust inversely when Italian supply tightens, creating a compensatory mechanism within the system.

Services inflation and spill over amplification

During summer drought conditions in Italy, Maltese services inflation—including catering and accommodation—rises by around 0.04 percentage points, a relatively small but statistically significant effect.

Because accommodation and catering have a disproportionately high weight in Malta's inflation index, the rising cost of imported food and energy inputs from Italy following a climate shock is transmitted rapidly into higher service prices

A structural vulnerability

The overarching conclusion is that Malta’s inflation and output cycles are deeply intertwined with climate conditions in Italy. The island’s economic exposure is not only geographical but structural, shaped by concentrated trade links and energy dependence.

For policymakers, the implication is that climate risk monitoring cannot remain purely domestic. Instead, Malta’s economic resilience increasingly depends on understanding the climate vulnerability of its external suppliers—particularly Italy.

In an era of intensifying climate volatility, the study suggests, Malta’s small size means that a heatwave or drought across the channel can quickly translate into measurable shifts in inflation, output and energy stability at home