Portugal’s economy continued growing in the final quarter of 2022, despite challenging global conditions. According to the flash estimate, GDP increased by 0.2% (q-o-q) in 2022-Q4, after growing by 0.1% and 0.4% in the previous two quarters. On an annual basis, growth in 2022 is estimated at 6.7%, up from 5.5% in 2021. Private consumption and net exports contributed significantly to the expansion, benefiting from a strong rebound in tourism after the lifting of COVID-19 restrictions. On the production side, industrial production and construction remained relatively weak, particularly in the last quarter of the year, due to unfavourable external conditions and volatile commodity prices.
In 2023 as whole, growth is forecast to slow down to 1.0%. Despite the recent downturn in wholesale energy prices and improving economic sentiment, the growth outlook for the first quarter of the year remains weak as consumers and businesses are still facing uncertainties about energy costs in the winter months. Growth is projected to improve somewhat in the second quarter of 2023 and to further pick up thereafter, reaching a full-year rate of 1.8% in 2024 against the backdrop of assumed stronger external demand and more favourable commodity prices.
Headline inflation rose from 9.5% (y-o-y) in 2022-Q3 to 10.2% in 2022-Q4 as the observed acceleration in prices of food and industrial goods outweighed the slowdown in prices of energy and services. The flash estimate for January 2023 confirmed the expectations that the peak in inflation was reached in 2022-Q4, as the headline inflation rate slowed to 8.6% (y-o-y) during the month, reflecting a substantial downturn in the energy price index.
Inflation is projected to slow further over the forecast period in line with the downward correction in wholesale energy prices and the assumed developments in commodity markets. The heavy rainfalls in the Iberian Peninsula over the past months are also expected to support the disinflationary path both on the energy and food markets, partly reversing the negative effects from the severe drought that affected the country until September 2022. The increased level of water reservoirs already appears to contribute to the significant decrease in the wholesale electricity prices on the Iberian market. However, rising wage pressures are expected to keep services prices and core inflation relatively high. Overall, inflation is projected to slow from 8.1% in 2022 to 5.4% in 2023 and 2.6% in 2024.