OECD Economic Outlook, Volume 2024 Issue 1

Portugal

Real GDP growth is projected to ease to 1.6% in 2024 and rebound to 2.0% in 2025. A tight labour market and falling inflation are supporting real wage growth and private consumption, and the implementation of the Recovery and Resilience Plan (RRP) will boost investment. Modest global growth and high uncertainty are holding back exports and investment, but this will fade as external demand strengthens. With stable energy prices and slowing labour demand, inflation will continue to moderate to 2.4% in 2024 and 2.0% in 2025.

Fiscal policy will become less restrictive. The implementation of the RRP, personal income tax cuts and increasing social benefits will support activity and compensate the phasing out of support measures to smooth the inflationary shock in 2024. Timely implementation of the RRP would strengthen green infrastructure, skill acquisition and healthcare capacity and support sustainable growth, as would additional measures to improve career guidance in education and reduce barriers in services sectors. Public debt will decline further below 93% of GDP in 2025. More efficient spending and a strengthened fiscal framework would help to address mounting spending pressures from an ageing population and strong investment needs in the long term.

Growth has been resilient

The effects of elevated inflation, tighter financial conditions and weak growth in Portugal’s main trading partners slowed economic activity in 2023. GDP broadly stagnated over the second and third quarter of 2023, before rebounding in the fourth quarter, driven by investment, exports and household consumption. Employment remains at a historically high level, and growth in the tourism sector and increasing RRP spending continue to support activity. Consumer price inflation eased to 2.6% in the year to March, and real wage growth and household confidence have recovered steadily. Industrial and services production and retail sales have increased in early 2024.

Portugal: Economic growth and inflation indicators

Source: OECD Economic Outlook 115 database.

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Portugal: Demand, output and prices

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Exports recovered in the fourth quarter of 2023 and goods exports and expected export orders continued to increase in early 2024. Energy and food prices remain high, but energy prices have declined and food price inflation slowed to 0.3% in the year to March. However, the past increase in interest rates has sharply raised mortgage payments and business costs, and a contraction in loans to households and firms is weighing on consumption and investment.

Public investment, tax cuts and higher social benefits will support growth

Fiscal policy is set to ease in 2024, with the budget balance projected to decline from 1.2% of GDP in 2023 to 0.3% in 2024. Spending from RRP grants is expected to increase from 0.6% of GDP in 2023 to 1.3% in 2024 and 1.8% in 2025, boosting public consumption and investment. By contrast, most measures to cushion the inflation shock will be phased out in 2024. These include the temporary cut of VAT on essential food products, the freeze in the carbon tax, as well as electricity, gas and fuel price subsidies. Yet, activity will be supported by further increases in public wages and the indexation of pension benefits, new targeted social transfers, the reduction in the personal income tax, as well as prolonged mortgage and rent subsidies, and new business tax incentives to raise investment. At the same time, the minimum wage rose by 7.9% in 2024, and a further 4.3% rise is expected in 2025, likely raising household income. However, the rise in labour costs could hold back low-wage employment and the foreseen large public investments and permanent personal income tax cuts could add to inflationary pressures. High interest rates will continue to weigh on activity.

Growth will progressively strengthen

GDP is projected to grow by 1.6% in 2024 and 2.0% in 2025. The projected recovery in activity across trading partners will support exports. Despite strong wage developments, consumption growth will remain moderate as employment growth eases and consumer prices and debt-servicing costs remain elevated. Tax cuts and increasing social transfers and public wages will provide some support to household incomes, but also slow the decline in inflation. Headline consumer price inflation will moderate from 5.3% in 2023 to 2.4% in 2024 and 2.0% in 2025 as energy and food prices stabilise and services price pressures diminish. The phasing out of energy and inflation support and high nominal GDP growth will help maintain budgetary surpluses and reduce public debt below 93% of GDP in 2025 (Maastricht definition). Higher‑than‑expected employment or wage growth would support consumption but also fuel inflation. By contrast, if RRP spending were implemented more slowly than projected, both growth and inflation would be lower.

Policies to support stronger and more sustainable growth

Despite a steady decline, public debt relative to GDP remains high. Strong growth, more efficient spending and a strengthened fiscal framework are needed to face mounting fiscal pressures from population ageing and investment needs in the long term. Continuing the roll-out of new accounting standards, developing performance budgeting and reducing tax expenditures would improve the structure and efficiency of public expenditures. Gradually strengthening carbon pricing and aligning prices across sectors and fuels while protecting vulnerable groups will help reach ambitious climate goals. Measures and investments under the RRP have a strong potential to support growth through more effective public sector management, green infrastructure and further skill acquisition. Ensuring the complete implementation of the RRP, strengthening information and counselling on educational and training programmes to guide students and workers, and lowering entry barriers in services and retail sectors will maximise the benefits.