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Economy and Finance

Economic forecast for Portugal

The latest macroeconomic forecast for Portugal. 

After a strong recovery, Portugal’s economy is projected to slow down substantially in the near term, constrained by weak external demand and high energy prices. Growth is expected to pick up again as of next summer but risks remain on the downside. Public finances are set to gradually improve over the forecast horizon, with the general government deficit narrowing to 1.9% of GDP in 2022, 1.1% in 2023 and 0.8% in 2024.

GDP growth (%, yoy)5,56,60,71,7
Inflation (%, yoy)0,98,05,82,3
Unemployment (%)6,65,95,95,7
General government balance (% of GDP)-2,9-1,9-1,1-0,8
Gross public debt (% of GDP)125,5115,9109,1105,3
Current account balance (% of GDP)-1,2-1,5-0,9-0,8

Strong rebound in tourism supports growth

Portugal’s economic growth picked up substantially in annualised terms in the first half of 2022, helped by a strong rebound in foreign tourism. Consequently, exports of services moved above pre-pandemic levels and with an annualised rise of around 70% turned into a major growth contributor. However, in quarter-on-quarter terms, GDP growth slowed abruptly from 2.4% in 2022-Q1 to 0.1% in 2022-Q2 reflecting a substantial disruption in global supply chains, particularly in energy and food markets. Nevertheless, exports of both goods and services performed well in 2022-Q2 and private consumption continued to grow albeit at a slower pace. Investment, however, contracted significantly (3.7% q-o-q) reflecting the plunge in business sentiments, a steep rise in commodity prices, particularly energy, as well higher interest rates.
The latest short-term indicators suggest a weak growth outlook for the second half of 2022 and the first quarter of 2023, as investment sentiment continues to suffer from global uncertainty and private demand is constrained by elevated energy bills. Overall, taking into account the strong carryover, full-year growth is forecast at 6.6% in 2022, followed by a substantial slowdown to 0.7% in 2023. Along with the projected trajectory in main trading partners, Portugal’s growth is set to pick up to 1.7% in 2024. In the external sector, the current-account balance is expected to worsen further in 2022 as the negative impact of energy prices outweighs the strong rebound in foreign tourism. However, the balance is set to improve in 2023 and 2024 amid the projected reversal in terms of trade and further growth in tourism.
Risks to the growth outlook remain significantly on the downside in light of the uncertain global environment and country-specific risks related to the severe drought on the Iberian Peninsula that may have prolonged repercussions on domestic food supplies.

Inflation set to moderate from high level

Inflation increased to 9.5% (y-o-y) in 2022-Q3 reflecting high energy prices, which triggered pass-through effects to other goods and services. Country-specific factors related to the extreme drought also pushed up inflation in Portugal, as unprocessed food prices increased by 18.1% in September (y-o-y) as compared to 12.7% in the euro area. Inflation is forecast to average 8.0% in 2022 and to gradually moderate to 5.8% in 2023 and 2.3% in 2024 amid the assumed decrease in prices of energy and food commodities while service prices are expected to remain high, paced by wage adjustments.

Employment sentiment remains favourable

The monthly unemployment rate stabilised at 6.0% from May until August, marginally above the rates reported earlier in the year but still below pre-pandemic levels. Employment growth meanwhile slowed from 5% (y-o-y) in January to 1% (y-o-y) in August. The job vacancy rate monitored on a quarterly basis reached a historic high of 1.4% in 2022-Q2 and employment expectations remained rather favourable despite the weakening overall economic sentiment. In year-average terms, unemployment is expected to remain stable at 5.9% in 2022 and 2023 and to improve marginally in 2024.

Public finances are set to gradually recover

The general government deficit is expected to decrease to 1.9% of GDP in 2022, from 2.9% of GDP in 2021. Government revenue benefits from the projected strong economic growth and high prices in 2022, reflected in both higher tax revenue and social contributions. The wind-down of COVID-19-related fiscal policy measures is set to curb expenditure. Pre-pandemic upward pressures on current spending, notably on social benefits and the public wage bill, are expected to persist in 2022. The rebound in public investment is also set to continue in 2022. Fiscal policy measures to mitigate the impact of high energy prices – notably, in the form of income support and reduced indirect taxes for both households and firms – are projected to have a budgetary cost of 2.1% of GDP in 2022.

The general government deficit is forecast to continue on a declining path in 2023 and 2024, reaching 1.1% and 0.8% of GDP respectively. 
The buoyant performance of government revenue is expected to continue alongside a moderate expansion of expenditure, on the back of the phasing-out of temporary pandemic-related emergency measures and the planned wind-down of energy-related fiscal policy measures. The overall budgetary cost for the latter is forecast to be 0.9% of GDP in 2023, and to have no impact in 2024, when all these measures are set to expire. Public investment is set to continue expanding in both 2023 and 2024, propelled by the implementation of the Portuguese RRP. Risks to the fiscal outlook are linked to contingent liabilities related to publicly guaranteed credit lines, the ongoing negotiation process of public-private partnerships’ (PPPs) rebalancing requests, and upward pressures on current expenditures, particularly on the public wage bill and those emerging from inflation and demographic ageing.

Driven by a favourable nominal growth-interest rate differential, the public debt-to-GDP ratio is set to continue its downward path in 2022, reaching 115.9%, already falling below its pre-pandemic levels, and to further moderate to 109.1% in 2023 and 105.3% in 2024.