In its recent report titled Assessment of the Macroeconomic Forecasts Underlying the Annual Progress Report 2026, the Malta Fiscal Advisory Council (MFAC) examined the potential implications of the escalating conflict in the Middle East for Malta's economic outlook. While Malta's direct trade exposure to the region is limited, the country could nevertheless face significant indirect effects through higher energy and food prices and imported inflation. Weaker external demand and heightened economic uncertainty add further pressure.

The cut-off date of the MFAC's report is 16 April, thus preceding the extension of the ceasefire. Nevertheless, as conditions on the ground continue to shift, the macroeconomic risks identified in this analysis remain pertinent.

Global energy markets were disrupted with the closure of the Strait of Hormuz, a key global energy transit route handling around 25% of global seaborne oil trade and 20% of global liquefied natural gas exports. As a result, Brent crude oil prices consequently surged from about $71 per barrel at the end of February to a peak of $138 in mid-April, before easing to around $97 by mid-June following US-Iran negotiations. European natural gas prices also rose sharply over the same period, increasing from roughly €32/MWh to about €48/MWh.

The conflict has also affected global supply chains more broadly. The Gulf region is an important exporter of fertilisers and other agricultural inputs, raising concerns about higher global food prices. Restrictions on regional airspace and reduced activity at major Gulf aviation hubs could also disrupt passenger and cargo transport, with implications for tourism, logistics and international business activity.

Malta's direct exposure through goods trade with the affected Gulf economies is relatively small. In 2025, exports to the region amounted to €84.6 million, representing only 2.5% of Malta's total goods exports. Similarly, imports from the region accounted for less than 1% of total goods imports over the past decade.

Exports to the region are concentrated in a narrow set of product categories. Food and live animals account for the largest share, representing 13.6% of Malta's exports in this category, while miscellaneous manufactured articles and chemicals account for only 2.8% and 1.9% of their respective categories.

Malta's economic structure provides an additional buffer against direct trade disruptions. Services account for around 85% of total exports, largely comprising modern services such as financial, IT, and business services, which are less exposed to geopolitical and logistical shocks than goods trade. In addition, 64.2% of Malta's services exports are directed towards European markets, with a very limited exposure to the Middle Eastern region.

The main transmission channels are therefore expected to operate through indirect effects. Higher energy costs and increased uncertainty are set to weigh on economic activity across Europe, particularly in countries with energy-intensive industries. Several of Malta's main trading partners have already experienced downward revisions to their growth outlooks for 2026. Germany is a notable case given its energy-intensive manufacturing base and is Malta's main export destination, accounting for around 20% of Malta's total goods and services exports. As a result, weaker European demand could negatively affect Maltese exports.

Tourism represents another indirect channel. Weaker real income in key source markets reduces discretionary spending on travel. While inbound tourists have remained resilient up to April, expenditure per capita has started to decelerate, suggesting that tourists may be becoming more cautious in their spending. At the same time, some tourists may redirect their travel to Malta if competing destinations in the Mediterranean are seen as riskier. However, overall risks remain skewed to the downside, particularly in the event of prolonged disruption to aviation routes or fuel supply chains.

Imported inflation represents another key transmission channel. Higher fuel prices, shipping costs and insurance premiums have pushed freight rates higher, with the Baltic Dry Index, a key measure of global shipping costs, rising by more than 50% between February and May 2026, albeit also showing signs of moderation in June. Fertiliser prices have also increased markedly, adding pressure to global food production costs. While Malta's fixed energy-price policy shields households and firms from direct energy price increases, around 60% of goods imports originate from EU countries, making Malta vulnerable to higher upstream costs transmitted through imports.

Elevated uncertainty may also weigh on domestic activity by delaying investment and encouraging precautionary savings. While government measures to stabilise energy prices help limit these effects, they entail higher fiscal costs, especially if energy prices remain elevated for a prolonged period. In this case, there is also a risk that fiscal space gets reallocated away from productive spending, such as investment, to accommodate the higher cost of such subsidies. This could weigh on the economy's long-term potential growth and competitiveness.

Since the cut-off date of this report, the announcement of a ceasefire between the US and Iran has provided some tangible relief in global energy markets. Nevertheless, oil production in the region remains constrained, and it could take some time for production and trade patterns to broadly recover. For Malta, the indirect pressures identified in this report, namely imported inflation and weaker European demand, are therefore unlikely to dissipate quickly. As a small and open economy heavily reliant on its trading partners, Malta is not immune to these dynamics simply by virtue of its limited direct exposure to the region. The ceasefire is a welcome development, but its durability remains uncertain, and the longer instability persists, the more likely it is that its economic shockwaves will be felt in Malta as well.