OECD upgrades GDP growth forecast to 2.5%, citing impact of EU funds

The Organisation for Economic Cooperation and Development has revised upwards its economic growth forecast for Portugal for this year, to 2.5%, citing the impact of European Union post-pandemic funding and of exports, particularly tourism, making the OECD the most optimistic among major national and international institutions.

In its report updating the economic outlook for 2023, published on Wednesday, the OECD forecasts growth of 2.5% in Portugal’s gross domestic product this year and 1.5% next, upgrading these from the previous forecasts of 1.0% growth this year and 1.2% in 2024.

For this year, Portugal’s own Public Finance Council (CFP) forecasts GDP growth of 1.2%, the Bank of Portugal 1.8%, the International Monetary Fund 1.0%, Portugal’s Ministry of Finance 1.8% and the European Commission 2.4%.

The OECD highlights the role of the Recovery and Resilience Plan (RRP) – under which EU post-pandemic recovery is being allocated – in the growth of public investment, but warns that high uncertainty and rising interest rates will continue to weigh on business and housing investment.

According to the report, the projected acceleration in activity among Portugal’s main trading partners will support exports, mainly those of services, such as tourism.

On the other hand, it points out that, “despite dynamic wage developments, consumption growth will moderate as employment growth slows, high inflation continues to reduce purchasing power, and rising interest rates increase debt service costs.”

For this year, the OECD forecasts exports of goods and services to grow by 8.0% and imports by 3.5%, while it sees domestic consumption selling by just 0.6% and investment by 3.1%.

In its reflections on the beginning of this year, it underscores that as energy and food prices remain high and interest rates continue to rise, domestic demand growth has slowed and inflation is reducing purchasing power.

However, RRP spending, budget support measures worth around 3.7% of GDP in 2023, and increased activity in Portugal’s main trading partners are supporting activity, it said, giving as an example that annual GDP growth in the first three months of 2023 was 1.6%, driven “significantly by strong export growth.”

The OECD stresses that reforms and investments under the RRP have “strong potential” to support growth.

“Ensuring the full implementation of the RRP will maximise the benefits,” it states, adding: “Further improving access to good-quality childcare would allow more women to enter the labour market and help reduce labour market disparities.”

 

… and cuts forecast for 2023 consumer inflation by 0.9pp to 5.7%

OECD also revised downwards its projection for consumer inflation in Portugal this year to 5.7%, a reduction of 0.9 percentage points from its last report.

In the Economic Outlook update, the organisation pencils in a reduction in the inflation rate from 8.1% in 2022 to 5.7% in 2023, before a further fall to 3.3% in 2024, as energy and food prices are seen stabilising.

These projections compare with the 6.6% for this year and the 2.4% for 2024 that had been forecast in the last OECD report, released in November.

Amongst other leading economic institutions, Portugal’s own Public Finance Council (CFP) is forecasting 2023 inflation of 5.9%, the Bank of Portugal 5.5%, the International Monetary Fund 5.7%, and both the Ministry of Finance and the European Commission 5.1%.

In terms of core inflation, the OECD forecasts a rate of 4.7% this year and 3.4% in 2024.

The Paris-based institution notes that “fiscal measures will provide some compensation to support the income of vulnerable households, but will slow the decline in inflation.”

It also predicts that “the phasing out of energy and inflation support and high nominal GDP growth will help reduce public debt to around 103% of GDP in 2024.”

The OECD also forecasts the public sector budget deficit to shrink from 0.4% of gross domestic product in 2022 to 0.1% this year and in 2024; the government itself has pencilled in a budget deficit of 0.4% this year and 0.1% next.

As for the overall burden of public debt, the OECD sees the downward trajectory continuing, with a drop in the ratio to GDP from 113.9% at the end of last year to 106.2% this and 102.9% in 2024.

The government itself is targeting a ratio of 107.5% this year and 103% in 2024.