Portugal

In recent years, Portugal has distinguished itself with an improvement in economic growth. While annual growth averaged +0.9% from 2010 to 2019 (Eurozone: +1.6%) and Portugal's economy was hit harder by the pandemic, growth slightly tailed the Eurozone’s average of +5.5% in 2021, and was double the regional average in 2022 at +6.7% - the second-highest growth rate in the region after Ireland. In Q1 2023, Portugal registered growth of +1.47% q/q, followed by +0.04% growth in Q2, showing the volatility of its economic situation. While growth will be constrained by the same challenges as the rest of the world – high inflation and tight monetary policy – the Portuguese economy will still benefit from, among other things, a strong tourism sector (17% of GDP in 2019), generous fiscal support from the EU and an easing in supply-chain restrictions. As a reslult, we expect a solid +2.5% GDP growth in 2023. Over the longer term, Portuguese growth should converge towards European growth at around +2% by 2027.

Since 2022, annual inflation in Portugal has been 15% lower on average than that of the rest of the Eurozone. Inflation rose sharply in 2022, but sank more rapidly in 2023 than in the rest of the region, with a y/y average of 8.4% in Q1 2023 – compared with 9% in the Eurozone. Core inflation rose later and less aggressively but is more persistent, with y/y core inflation exceeding headline inflation for the first time in Q2 2023 at 5.7%. Inflationary pressures are prompted by the strong growth in nominal wages, particularly after the agreement reached in 2022 to raise private sector workers' wages by +5.1% in 2023, and by a compounded rate of +20% by 2026. Inflation should, however, be tamed by then: After 5.3% in 2023, we expect it to decrease from 3.4% in 2024 to the ECB’s target rate of 2.0% in 2026.

As a member of the Eurozone, Portugal is dependent on monetary policy led by the European Central Bank. The ECB remained determined to tackle inflation by raising policy rates again in October in what is believed to be the last hike, depending on the reduction of inflationary pressures. The ECB refinancing rate now stands at 4.5%, a level not seen since 2001.

The Portuguese business environment appears to be good overall, but has some major shortcomings that impede the economy's ranking as a favourable business environment. In particular, it suffers from a complex tax system, poor rail infrastructure and a low technological readiness. In the 2022 Heritage Foundation’s Index of Economic Freedom survey, Portugal ranked 31st in the world and 21st in the region. It scored very well in property rights, judicial effectiveness and monetary freedom, but lagged far behind on terms of labor freedom and government spending. The World Bank’s 2022 Worldwide Governance Indicators survey ranked it 56th worldwide for regulatory quality, 32nd for rule of law – improving compared to 2021 – and 47th for control of corruption. As to the environmental sustainability of Portugal, our proprietary indicator shows strengths in climate change resistance and energy use per GDP, but weaker performances in renewable electricity output and recycling rate – ranking Portugal as the 24th most sustainable country.

António Costa, Portugal's prime minister and leader of the centre-left Socialist Party (PS), resigned on 07 November after several government officials were made formal suspects of an investigation into possible crimes of corruption related to mining and energy concessions. The president Marcelo Rebelo de Sousa called for a snap election in March 2024. Costa’s Socialist Party has consistently confounded fears of economic mismanagement since taking office in late 2015 by exercising strong fiscal discipline while overseeing robust economic growth. Indeed, the budget balance swung from a deficit of 7.4% of GDP in 2014 to a surplus of 0.8% in 2023, while total government debt fell from 132% of GDP to 112%.

In the near term, political events should not have much impact on fiscal policy because the draft 2024 budget – which was first approved by parliament just a week before Costa’s resignation – looks set to be implemented as originally planned. However, the possibility that the centre-right Social Democratic Party (PSD), which is the Socialists’ main rival and which oversaw stagnation during the European debt crisis, could jeopardise economic gains, especially given that it would probably need to form a coalition with the far-right populist Chega group to secure a majority.