Portugal's Economic Outlook: Growth Forecast and Inflation Trends

Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024.

Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024.

More signs that core inflation will fall further

Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation.

However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024.