From bigger to better: Malta’s next economic challenge

By Lina Klesper LL.M.

Malta has spent much of the past decade proving that a small economy can grow quickly. The latest figures provide little reason to question that record. Real GDP grew by 4.5% in the second quarter of 2026, following 4.2% growth in the first quarter, with services continuing to drive the expansion. Fitch Ratings' affirmation of Malta's A+ sovereign rating is another indication of the strength of the country's economic performance. But strong growth also creates a different question: what should the next phase of Malta's economic development look like? The answer may be less about making the economy simply larger and more about making it more productive.

Malta's recent economic expansion has been closely linked to a rapidly growing workforce and population. The International Monetary Fund estimates that the economy grew by almost 7% annually on average over the past decade, driven by tourism, online gaming and professional services and supported by substantial inflows of foreign workers. But it also warns that this labour-intensive model is approaching its limits as population density, infrastructure constraints and labour shortages increase.

The demographic outlook makes the issue particularly clear. A recent Central Bank of Malta analysis of long-term population scenarios found that, under its extreme “no migration” scenario, Malta's population could fall from around 570,000 today to about 530,000 by 2050 and 252,000 by 2100. This is a scenario rather than a forecast, but it illustrates the extent to which Malta's recent population trajectory depends on migration. Under the baseline scenario, by contrast, the population is projected to peak at more than 766,000 in 2073.

The point is not that population growth, or foreign workers are an economic problem. Foreign workers have been an important part of Malta's growth story. Rather, the figures raise a longer-term question of how Malta can generate more economic value without relying indefinitely on a growing population and labour force. That means shifting the emphasis from more workers to more productive workers, supported by technology, skills and higher-value investment.

For Malta to make that transition, skills will be as important as physical infrastructure. The Commission identifies persistent skills shortages and mismatches, including in science, technology, engineering and mathematics. At the same time, the latest labour-market figures show that Malta's skills base is changing: 41.1% of workers had a tertiary education in the second quarter of 2026, up from 38.5% a year earlier.

This creates both a challenge and an opportunity. Businesses cannot move into higher-value activities if they cannot find the people capable of supporting them. But a more highly educated workforce also creates the potential to move beyond labour-intensive growth towards activities where knowledge and technology generate greater value.

AI should therefore not be viewed simply as another technology sector Malta hopes to attract. Its economic value may lie just as much in what it can do across existing businesses: automate routine processes, improve decision-making, analyse data and allow skilled employees to concentrate on higher-value work.

Technology alone, however, does not create a more productive economy. Malta also needs businesses capable of developing, financing and scaling new ideas. Here, the European Commission's 2026 Country Report highlights Malta's relatively low levels of research and development investment and points to the need to strengthen innovation, skills and the digitalisation of businesses. It also identifies infrastructure bottlenecks and labour shortages as constraints on future growth.

This is where Malta Vision 2050 becomes relevant as the strategy explicitly places productivity-led growth, innovation, digital transformation and high-value sectors such as advanced manufacturing within its long-term economic framework. Its high-end manufacturing initiatives include the integration of AI, robotics, IoT and big data, alongside efforts to scale production and attract new semiconductor manufacturers.

The Government has also set an ambition for manufacturing value added to increase by €1 billion over the next decade. One example of what this could look like is STMicroelectronics' Malta operation, which has invested in R&D and introduced digital and robotics technologies, including automation and AI-powered systems, to improve advanced manufacturing processes.

The challenge is to turn such individual examples into a broader economic model. AI and robotics should not only create another digital-services niche; they can also help Malta make high-value manufacturing more competitive and generate greater output without a proportional increase in the workforce.

Such a new economic strategy could change how businesses think about growth. Rather than relying primarily on a larger workforce, businesses will increasingly need to invest in skills, systems and technology that enable existing employees to generate more value.

The latest labour-market figures illustrate the transition. Employment rose by 3.4% year-on-year in the second quarter of 2026, while average monthly basic pay increased 6.2% to €2,282. The challenge is to ensure that rising wages are supported by rising productivity, creating more high-value jobs and businesses rather than simply increasing labour costs.

Malta Vision 2050 provides a framework for this transition by moving beyond GDP as the sole measure of progress and setting targets for human development, median disposable income, and life satisfaction by 2050. Its economic pillar calls for sustainable, productivity-led growth and greater emphasis on high-value sectors.

However, having a long-term vision is not the same as delivering it. The European Commission notes that Vision 2050 provides an integrated long-term strategy and performance indicators, but also that the capital allocations required to achieve the vision are not yet clearly set out, while public capital budgeting continues largely on an annual cycle.

For businesses, this is where the ambition becomes concrete. If Malta wants an economy built around AI, advanced manufacturing, skills and innovation, the necessary investment in infrastructure, energy, research, education and efficient public administration must follow.

Malta has already demonstrated that it can grow rapidly. The A+ rating, low unemployment and continued GDP expansion are evidence of that. The challenge now is to demonstrate that it can grow differently. Malta does not necessarily need to become a much bigger economy. The more important ambition may be to become a better one, where knowledge, technology and enterprise allow economic growth to translate into higher productivity, better-paid work and greater value created without relying indefinitely on population growth.

Lina Klesper LL.M. is International Legal Assistant at PKF Malta