Economic growth in Portugal is set to further moderate in 2024 before picking up again in 2025, pushed by private consumption and investment. Headline inflation is projected to continue receding over the forecast horizon amid a steady increase in employment and a relatively stable unemployment rate. Portugal’s general government balance recorded a surplus in 2023. It is projected to decrease in 2024 and 2025, albeit remaining in positive territory.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 2.3 | 1.7 | 1.9 |
| Inflation (%, yoy) | 5.3 | 2.3 | 1.9 |
| Unemployment (%) | 6.5 | 6.5 | 6.4 |
| General government balance (% of GDP) | 1.2 | 0.4 | 0.5 |
| Gross public debt (% of GDP) | 99.1 | 95.6 | 91.5 |
| Current account balance (% of GDP) | 1.3 | 0.8 | 0.6 |
Domestic demand is turning into the main growth driver
Economic growth slowed down to 2.3% in 2023, reflecting a broad-based deceleration across all main GDP components. The main slowdown took place in the second and third quarters of 2023, followed by a rebound in the final quarter of the year. Both private consumption and investment increased substantially in the final quarter of the year, helped by the stabilisation in interest rates. Net exports contributed positively to GDP growth for the year as a whole, mainly due to the strong performance in tourism. However, imports started outpacing exports in the second half of the year, in line with the rebound in domestic demand. According to Eurostat’s flash estimate, GDP rose by 0.7% (q-o-q) in the first quarter of 2024, supported by private consumption and exports. Growth in tourism slowed down substantially in January 2024 but high-frequency indicators pointed to an acceleration in February and March.
Taking into account the recent surge in households’ income and the stabilisation in interest rates, economic growth is projected to move towards a more domestic-driven model over the forecast horizon. In full-year terms, growth is expected to moderate to 1.7% in 2024 and to rebound to 1.9% in 2025. Investment is projected to grow at a strong pace, helped by the implementation of the Recovery and Resilience Plan as well as by the recent improvement in economic sentiment. In the external sector, imports are set to outpace exports as investment, and to a lesser extent private consumption, are set to increase import demand. Foreign tourism is projected to remain an important growth factor albeit at a slower pace than in the last two years. Overall, Portugal’s current-account balance is set to decrease but to remain in positive territory in 2024 and 2025.
Labour supply and employment continue to rise at strong pace, helped by migration
The unemployment rate increased from 6.2% in 2022 to 6.5% in 2023 amid strong growth in both labour supply and employment. According to the labour force survey, employment growth remained robust also in the first months of 2024 but unemployment edged up slightly along with rising labour supply. Data shows a substantial increase in the working-age population in early 2024, which is explained by positive migration flows. Unemployment is expected to decline somewhat over the coming months as job creation is set to gradually absorb the increase in labour supply. In full-year terms, unemployment is projected at 6.5% in 2024 and 6.4% in 2025. As some sectors of the economy continue to experience tight hiring conditions, wages are set to grow somewhat faster than inflation, supported also by sound profit margins in the corporate sector.
Commodity prices continue to support disinflation
Headline inflation decreased from 8.1% in 2022 to 5.3% in 2023, reflecting a substantial deceleration in prices of energy and other commodities. In quarterly terms, inflation reached 2.4% (y-o-y) in the last quarter of 2023 but edged up to 2.5% in the first quarter of 2024, mainly due to base effects in energy prices. However, services inflation moderated at a much slower pace to 5.0% (y-o-y) in the first quarter of 2024, pushed by strong wage growth and demand pressures from tourism-related activities. The projected increase in real wages and employment is set to keep some pressure on prices, leading to a much slower adjustment in services inflation. All in all, inflation is forecast to continue easing to 2.3% in 2024 and 1.9% in 2025.
General government balance to remain in surplus
Portugal’s general government balance improved to a surplus of 1.2% of GDP in 2023. Government revenue benefited from the outstanding performance of tax revenue and social contributions underpinned by dynamic economic activity, high inflation and a robust labour market. Government expenditure growth was comparatively muted, thanks to the complete phase-out of COVID-19 temporary emergency measures and the reduced net budgetary impact of measures to mitigate the impact of high energy prices. The net budgetary cost of the latter is estimated at 0.9% of GDP in 2023, compared with 2.0% in 2022.
The general government surplus is forecast to narrow to 0.4% of GDP in 2024 and to remain broadly stable in 2025, based on unchanged policies. This would come on the back of the projected economic slowdown and the moderation in inflation, as well as of balance-reducing fiscal policy measures, notably the reform of the personal income tax included in the 2024 State Budget and the discretionary increases in public wages and pensions. Public investment is expected to further expand linked to the implementation of the Recovery and Resilience Plan and other EU-funded programmes. Interest expenditure is set to mildly increase amidst tighter financing conditions. The net budgetary cost of energy-support measures is projected to decrease to 0.6% and 0.5% of GDP in 2024 and 2025, respectively. Risks to the fiscal outlook are on the downside and relate, among others, to ongoing processes for financial rebalancing of public-private partnerships.
After reducing by approximately 13 pps. in 2023 to 99.1%, Portugal’s public debt-to-GDP ratio is set to continue to steadily decline but at a slower pace. The projected primary balance surpluses and the favourable growth-interest rate differential are forecast to drive the ratio down to 95.6% in 2024 and 91.5% in 2025.