The Bank of Portugal (BdP) this Friday improved its inflation forecast for this year to 5.2%, reflecting the easing of external inflationary pressures and the impact of the temporary VAT cut.
In July’s “Economic Bulletin,” published this Friday, the banking regulator highlights that inflation has been on a downward path since late 2022.
“The inflation rate is expected to decline from 5.2% this year to 3.3% in 2024 and 2.1% in 2025, a value already close to the monetary policy target,” he stressed.
These projections are similar to those of the March report, which pointed to a rate of 5.5% this year, 3.2% in 2024 and 2.1% in 2025.
The downward revision of 0.3 percentage point (pp.) is explained by “less external inflationary pressures and the impact of the temporary VAT reduction for some food products partly offset by higher internal pressures on the services component”.
The BdP explains that in 2023, the fall in prices should be due to the more volatile components of the Harmonized Index of Consumer Prices (HICP), “essentially reflecting the expected reduction in the price of energy and food commodities in international markets.
The reduction in inflation excluding these goods will be “later” due to “delayed indirect effects arising from the volatile components of inflation and the pressures associated with rising wages and profit margins”.
The stronger tightening of monetary policy, in a context of anchored inflation expectations, should imply the convergence of inflation at the end of the horizon towards values consistent with the objective of price stability and close to those projected for the euro area “, he makes clear.
GDP improves GDP forecast to 2.7% this year and 2.4% in 2024
The Portuguese economy will grow by 2.7% this year and 2.4% in 2024, the Bank of Portugal (BdP) predicts, which this Friday revised its GDP projections upward, reflecting the better-than-expected performance in the first quarter. emphasized.
The July “Economic Bulletin” improved forecasts for activity growth compared to the 1.8% for this year and 2% for 2024 and 2025 expected in March.
“The Portuguese economy is expected to grow by 2.7% in 2023, 2.4% in 2024 and 2.3% in 2025,” the report read.
The regulator is therefore more optimistic than the government, which forecasts growth of 1.8% this year and 2% in 2024.
The BdP points out that gross domestic product (GDP) after recovering from the pandemic shock was 5.4% above 2019 levels in early 2023 and expects growth to be “robust and superior to that of the eurozone”. on the projection horizon.
The upward revision for this year is partly explained by higher-than-expected GDP growth in the first quarter (1.6% on a chain), mainly driven by exports.
While the BdP expects this performance to slow down over the year, the BdP points out that available indicators point to further growth in activity, with chain-linked variations of 0.3% in the second quarter and 0.5% in the next two quarters. quarters.
In the case of domestic demand, this revision is supported by prospects for higher growth in real disposable income while maintaining labor market dynamism, while in the case of exports it reflects additional market share gains in the services sector, in line with recent developments,” he explains.
The institution led by Mário Centeno now forecasts an export increase of 7.8% this year and 4.2% in 2024, up from 4.7% and 3.7% in March, respectively.
“In 2024-2025, the growth rate of tourism exports slows down, but it remains higher than that of external demand for goods and services. Exports of goods slow down to 2.8% in 2023 (5.1% in 2022), reflecting the slowdown in external demand,” he foresees.
Private consumption growth was also revised upwards to 1.6% this year and 1.7% in 2024 (previously at 0.3% and 1% respectively) and domestic demand growth to 1.1% in 2023 and 2.4% in 2024 (versus 0.8% and previously 1.8%).
Investment, on the other hand, will slow down to 3.1% in 2023, “conditioned by the greater restrictiveness of monetary policy, with the consequent deterioration in borrowing costs”.
The central bank believes that housing investment is most affected by the most adverse financial conditions, which also negatively impact business investment, “which is amplified by relatively high uncertainty”.
On the other hand, he expects “a strong boost in 2023” in public investment (25%), followed by a slowdown to 7% in the following years.
In the labor market, he predicts that “demand pressure will remain relative to supply” and that the unemployment rate will reach 6.8% this year and 6.7% in 2024 and 2025.
“The shrinking margin of available resources in the labor market and high inflation contribute to an acceleration of compensation per employee in 2023 (from 6.1% to 7.2%), with an expected gradual slowdown to 3.8% in 2025″, predicts.
Deficit forecast of 0.1% in 2023 and surplus from 2024
The Bank of Portugal (BdP) sees an improvement in the budget balance faster than the government, pointing to a deficit of 0.1% this year, followed by a surplus of 0.2% from 2024.
In the July “Economic Bulletin”, the institution publishes for the first time forecasts for the budget balance, which it believes will be close to balance by 2025.
After a deficit of 0.4% of the Gross Domestic Product (GDP) in 2022, GDP foresees a decline to 0.1% in 2023 and surpluses of 0.2% in the following years.
Source: DN
