OECD Economic Outlook, Volume 2023 Issue 2

Portugal

GDP growth is projected to be 2.2% in 2023, 1.2% in 2024 and 2.0% in 2025. Low business and household confidence, modest global growth and high uncertainty are holding back activity, although the tight labour market will support wage growth and private consumption, and the implementation of the Recovery and Resilience Plan (RRP) will boost investment. A progressive strengthening of external demand will support exports in 2024‑25. As energy and food prices stabilise and labour demand slows, inflation will fall to 3.3% in 2024 and 2.4% in 2025.

Fiscal policy will ease. The phasing out of support measures to smooth the inflationary shock is projected to be compensated by the implementation of the RRP and household tax cuts in 2024. Timely implementation of the RRP will strengthen green infrastructure, skills acquisition and healthcare capacity. Public debt will decline further and fall below 100% of GDP in 2025. More efficient public spending and a strengthened fiscal framework will help to address mounting spending pressures from an ageing population and strong investment needs.

Growth has declined

The effects of inflation, tighter financial conditions and weak growth in Portugal’s main trading partners have curbed economic activity, although fiscal measures are providing some offset. GDP broadly stagnated over the second and third quarters of 2023. The strong recovery in the tourism sector and increasing RRP spending have supported activity. Yet, industrial production has slowed, and goods exports have declined. Consumer price inflation, which eased to 3.2% in the year to October, and rising debt servicing costs are reducing household consumption and investment. Despite historically high employment rates and wage growth, household and business confidence declined between August and October.

Portugal: Economic growth and fiscal indicators

1. Maastricht definition.

Source: OECD Economic Outlook 114 database; and Statistics Portugal (INE).

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Portugal: Demand, output and prices

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Merchandise exports declined by 8.2% in the year to September, and expected export orders have deteriorated further in the manufacturing sector. Increasing interest rates are rapidly raising mortgage payments, with around 90% of mortgages subject to variable interest rates. This is holding back consumption and investment. Energy and food prices remain high, although energy prices have declined and the risk of energy supply shortages appears contained, with around 60% of electricity generated from renewable sources in 2022, and elevated gas storage levels.

Public investment and tax cuts will support economic activity

Fiscal policy is set to ease in 2024-25, with the budget balance projected to decline from 0.8% of GDP in 2023 to 0.2% in 2024 and 2025. Spending from RRP grants is expected to increase from 0.8% of GDP in 2023 to 1.9% in 2024 and 1.1% in 2025, boosting public consumption and investment. By contrast, most measures to help cushion the inflation shock will be phased out in 2024. These include the temporary cuts in energy taxes and VAT, the freeze of the carbon tax, as well as electricity, gas and fuel price subsidies. However, 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, prolonged mortgage subsidies, and new business tax incentives to raise investment. The minimum wage will also increase by 7.9% in 2024, with a further 4.3% rise expected in 2025, 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 in 2024.

Growth will progressively strengthen

GDP growth is projected to be 2.2% in 2023, 1.2% in 2024 and 2.0% in 2025. The spending of European funds is significantly boosting public investment, and the projected recovery in activity across trading partners will support exports. High uncertainty and interest rates will continue to weigh on activity. 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 5.5% in 2023 to 3.3% in 2024 and 2.4% 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 lower public debt to around 98% of GDP in 2025 (Maastricht definition). Higher-than-expected employment or wage growth would support consumption but also fuel inflation. By contrast, RRP spending could be implemented more slowly than projected, implying both lower growth and lower inflation.

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: the 2021 Ageing Report projects public health, long-term care and pension expenditures to rise by 3% of GDP by 2040. Temporary fiscal support to cushion the inflation shock should be phased out, as planned. Continuing to roll out new accounting standards, develop performance budgeting and reduce 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 guidance on educational and training programmes for students and workers, and lowering entry barriers in services and retail sectors will maximise the benefits.