The Bank of Portugal (BdP) this Friday improved its growth forecast for the Portuguese economy this year to 1.8%, more optimistic than the government but warning of the more restrictive financial environment.
In the March economic bulletin, the banking regulator points to a slowdown in gross domestic product (GDP) growth from 6.7% in 2022 to 1.8% this year, with growth of 2% in 2024 and 2025.
This year’s GDP projection was revised upwards from the December report, when it pointed to growth of 1.5%, and is also above the government forecast of 1.3% – which may be updated in the stability program in April .
The institution led by Mário Centeno points out that economic activity should accelerate throughout the year and that since the end of 2022 there has been a reduction in the cost of energy raw materials, contributing to an improvement in the terms of trade of the economy and a reduction of external pressures on consumer prices.
The BdP maintains its forecast for 2024, explaining that the growth forecast is based on the expectation of a decrease in uncertainty, greater growth in households’ real income and the receipt of European funds.
However, he points out that “it will be determined by the more restrictive financial environment”.
The bank forecasts that investment and exports will resume the growth paths observed in the pre-pandemic period, increasing their weight in GDP and contributing to sustained growth in the Portuguese economy.
Among the key components, the regulator forecasts private consumption to grow by 0.3% this year and 1% in 2024, and investment by 2.3% in 2023 and 5.2% in 2024.
The BdP points to export growth of 4.7% this year and 3.7% in 2024 and import growth of 2.4% and 3.4%.
The labor market remains robust over the projection horizon and projects the unemployment rate to rise to 7% in 2023, close to what was observed in 2018–19), due to “recent developments and the lagged effect of the slowdown in activity for more than 2022”, while in 2024–25 the unemployment rate will be reduced to 6.7% at the end of the horizon.
Among the main risks to the activity, the BdP points to “the impact of the normalization of monetary policy, the increase in financial market frictions and the escalation of the conflict in Ukraine”.
BdP sees inflation at 5.5% this year and signals rising food prices
The Bank of Portugal also lowered the inflation rate to 5.5% this year, above the government’s forecast of 4%, as a warning of the acceleration in the price of food commodities.
The institution led by Mário Centeno believes that the inflation trajectory will be downward, but that the pace of price acceleration, despite a decrease from last year, will be higher this year than the bank expected in December.
The BdP expects the Harmonized Index of Consumer Prices (HICP) to decrease from 8.1% in 2022 to 5.5% in 2023, to 3.2% in 2024 and to 2.1% in 2025.
This scenario is similar to December’s expected inflation of 5.8% this year and 3.3% in 2024, as well as the executive’s forecast of 4% this year.
The BdP predicts that the IPHC excluding energy goods will reach a rate of 6.7% this year, 3.2% in 2024 and 2.4% in 2025.
The regulator explains that “in the coming quarters, the fall in inflation will mainly be based on the evolution of energy and food prices, but its magnitude is uncertain”.
It also points out that “the moderation in the rise in the prices of other goods and services will be slower due to the lagged effects of energy commodity prices, recovery in profit margins and wage growth”.
“The continued strong price increases in the euro area, especially in components with less volatile prices, have fueled expectations of more restrictive monetary policy over the projection horizon,” he says.
However, the BdP warns that, “despite the fall in headline inflation, the year-on-year rate of change in food prices continued to increase, reaching 19.0% in February 2023”.
It illustrates that, by component, the year-on-year change in unprocessed food prices was 21.8% and processed goods prices were 17.9%, reaching maximums in both cases.
Source: DN
