After a strong rebound in early 2023, economic growth is set to weaken in the second quarter of the year and to pick up again thereafter. Headline inflation is projected to moderate although wage adjustments amid record high employment are expected to keep pressure on prices of services. After narrowing to 0.4% of GDP in 2022, Portugal’s general government deficit is forecast to improve to 0.1% of GDP in 2023 and 2024.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 6,7 | 2,4 | 1,8 |
| Inflation (%, yoy) | 8,1 | 5,1 | 2,7 |
| Unemployment (%) | 6,0 | 6,5 | 6,3 |
| General government balance (% of GDP) | -0,4 | -0,1 | -0,1 |
| Gross public debt (% of GDP) | 113,9 | 106,2 | 103,1 |
| Current account balance (% of GDP) | -1,5 | 1,0 | 0,8 |
Tourism continues to support growth
Economic activity picked up at the beginning of 2023, helped by a further increase in tourism. GDP growth is estimated at 1.6% (q-o-q) in 2023-Q1, strongly up from the rates recorded in the previous three quarters. However, domestic demand remained weak, as private consumption was constrained by the decline in purchasing power of households in previous quarters and investors were confronted with higher interest rates. The external sector was the major growth driver in 2023-Q1, benefiting from the recovery in global supply chains and a very strong increase in tourism visits, in particular from North America. The steep recovery in Portugal’s water reservoirs also supported the external balance, as the rebound in domestic hydropower production reduced import demand for electricity and natural gas.
Economic growth is projected to weaken in 2023-Q2 and to pick up again in the following quarters against the backdrop of a gradual recovery in households’ real disposable income and private consumption. Investment growth is also set to improve, as the drop in global commodity prices and the recovery in global supply chains, along with the expected inflows of EU funds, are projected to outweigh the negative impact of higher interest rates. In full-year terms, real GDP growth is forecast to slow down from 6.7% in 2022 to 2.4% in 2023 and 1.8% in 2024.
In the external sector, exports are projected to rise much faster than imports in 2023 due mainly to the strong performance in tourism. In 2024, imports are projected to grow somewhat faster than exports in line with the recovery in private consumption and investment. In nominal terms, Portugal’s external balance is forecast to benefit substantially from the drop in energy prices in 2023 and higher prices in tourism, leading to a marked improvement in the current account balance.
Labour activity rates rise faster than employment
The unemployment rate improved from 6.6% in 2021 to 6.0% in 2022. However, the monthly figures increased in late 2022 and early 2023, driven by a strong rise in job-seeking activity while employment grew only marginally. Both employment and activity rates reached record high levels in early 2023 amid rising wage pressures. In annual average terms, unemployment is forecast at 6.5% in 2023 and 6.3% in 2024 amid a moderate increase in employment and real wages, broadly compensating employees for the loss of purchasing power in 2022.
Inflation expected to moderate
After reaching a historic high of 10.2% (y-o-y) in 2022-Q4, HICP inflation moderated to 8.4% (y-o-y) in 2023-Q1. The reduction was largely driven by lower energy prices while food prices remained elevated. Inflation is set to moderate further over the forecast horizon, driven initially by the energy price index and later by food and non-industrial goods. In 2023, the moderation in food prices is also supported by a suspension of VAT rates for essential food products effective from 18 April until end-October. Overall, inflation is forecast at 5.1% in 2023 and 2.7% in 2024. Core inflation is expected to move somewhat above the headline rate, as the projected recovery in real incomes will weigh on prices of services, which are also set to moderate but at a softer pace.
Public finances with a favourable outlook
Portugal’s general government deficit decreased to 0.4% of GDP in 2022. Government revenue benefited from the strong economic rebound and the favourable labour market developments, with tax revenue being boosted by inflation. In turn, the wind down of COVID-19-related measures contributed to curb expenditure. Public investment continued to expand in 2022.
The general government deficit is forecast to narrow in 2023 to 0.1% of GDP and remain unchanged in 2024. The dynamic growth of government revenues is expected to continue in 2023, and to ease somewhat in 2024. Tax revenue is the main driver of this growth, particularly that from indirect taxation, still reflecting the sustained elevated prices. Government expenditure is projected to continue to expand, albeit at a lower pace than revenues. Upward pressure on current spending, notably on social benefits and the public wage bill, is expected to persist through the forecast horizon. Driven by the implementation of the Recovery and Resilience Plan (RRP) and other EU-funded programmes, public investment is forecast to surge in 2023 and 2024. The tightening of financing conditions is expected to increase interest expenditure. Downside risks to the fiscal outlook are associated with the contingent liabilities arising from publicly guaranteed credit lines and ongoing processes for financial rebalancing of public-private partnerships.
The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 0.8% of GDP in 2023, compared with 2.0% in 2022. The Commission currently assumes a full phasing out of energy support measures in 2024. Deficit developments in 2023 are also affected by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.8% of GDP in 2022.
Portugal’s public debt-to-GDP ratio contracted considerably to 113.9% in 2022, already below pre-pandemic levels. Thereafter, it is projected to continue on a downward path in 2023 and 2024, driven by a favourable growth-interest rate differential and improvements in the general government primary balance.