Portugal’s Public Finance Council (CFP) has improved its Gross Domestic Product (GDP) growth outlook for this year to 6.7% but cut it for next year, now forecasting a sharp slowdown to 1.2%, it said on Thursday.
In the report updating the economic and fiscal outlook 2022-2026, the institution chaired by Nazaré Costa Cabral forecast an acceleration of growth in the Portuguese economy to 6.7% this year from 4.9% in 2021.
The upward revision of 1.9 percentage points (p.p.) compared to the forecast in March is mainly the result of the “strong performance” registered in the first half of the year.
However, for next year it is more pessimistic, expecting an “expressive slowdown” in growth to 1.2%, a cut of 1.6 p.p. compared to March, reflecting inflationary pressures, the slowdown in external demand and the worsening of the economy’s financing conditions.
“The lower contribution of domestic demand reflects the deceleration dynamics projected for all its components (especially private and public consumption), while the reduction in the contribution of net exports reflects the expectation of a sharp deceleration in exports of goods and services, partially mitigated by an expected slowdown in imports”, it explains.
The CFP estimates that private consumption will grow by 5.1% this year and 0.5% next year, public consumption by 1.9% in 2022 and 0.3% in 2023, and investment will be 3.6% this year and 2.9% next year.
Exports are expected to increase by 17.8% this year, falling to 3.6% next year, while imports rise by 12.1% this year and 2.6% in 2023.
The CFP scenario, which is based on invariant policies, also predicts that after GDP growth accelerates to 2% in 2024, it should stabilise at around 1.8% in the medium term.
The institution indicates that with the new projection, the level of real GDP will be 2.4% above its pre-pandemic level in 2022 and anticipates “that the medium-term level for real GDP projected in the pre-pandemic (October 2019) should only be reached in 2025”.
However, the institution warned that the macroeconomic scenario it outlines is marked by “high uncertainty”, with “the risks being predominantly of an external nature, and tilted downwards for economic activity growth and upwards for inflation”.
Among the risks, it points to the worsening conflict in Ukraine, which “could lead to an eventual interruption in the supply of energy goods from Russia to Europe,” as well as the possible worsening of inflationary pressures, which could lead to “the maintenance or strengthening of covid-zero measures in China, which prolong the constraints in global production and distribution chains” and “inflation (including energy and food goods) pass through to underlying inflation.”
“In the latter case, the increase in inflation expectations over the medium term could result in a faster normalisation of monetary policy and consequent worsening of the economy’s financing conditions – with more significant consequences for Portugal due to the high indebtedness of families and companies,” it warns.
It also identifies as risks the cooling of global demand for international tourism, as well as delays in its implementation of the Recovery and Resilience Plan (RRP), could lead to “a Gross Fixed Capital Formation substantially lower than projected.
“On the other hand, the delay in its execution and the increase in investment prices could lead to a negative impact in real terms – for the amount of investment already planned in nominal terms not being possible to realise the planned investment in volume,” it concludes.
