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Press release of the Banco de Portugal on the March 2023 issue of the Economic Bulletin

The Portuguese economy is expected to grow by 1.8% in 2023 and 2% in 2024 and 2025. Upward developments in activity benefit from the expected decline in uncertainty, higher real household income growth and EU fund inflows, but are projected to be constrained by the tighter financial environment.

Inflation is projected to stand at 5.5% in 2023, decreasing to 3.2% in 2024 and 2.1% in 2025. In the coming quarters, this downward path is expected to be supported by developments in energy and food prices, but should broaden thereafter amid monetary policy normalisation.

In the labour market, employment is expected to remain strong, against a background of projected gains in real average wages. The unemployment rate is projected to increase to 7% in 2023, declining in the following years, to stand at 6.7% in 2025.

Compared with December, the projection for GDP growth in 2023 is revised upwards, reflecting more favourable developments in tourism exports and, to a lesser extent, private consumption. The reduction in inflation this year is expected to be more significant than that projected in December, reflecting the adjustment in energy markets. Projections for 2024-25 remain virtually unchanged.

Private consumption is expected to increase by 0.3% in 2023, in a context of muted growth in real disposable income and a recovery in the savings rate. The slowdown in prices and wage developments are expected to contribute to higher real disposable income growth in 2024-25, allowing private consumption to increase by 1.2%, on average, and the savings rate to edge up to close to its pre-pandemic levels.

Investment is projected to grow by 2.3% in 2023, constrained by rising financing costs. In 2024-25, it is expected to accelerate to 4.7%, on average, continuing to benefit from EU funds, in particular those associated with the Recovery and Resilience Plan (RRP). 

Total exports are expected to outgrow foreign demand over the projection horizon (4.1% compared with 2.9% respectively, on average, in 2023-25), with buoyant exports of services standing out.

The current and capital account is expected to return to  a surplus, exceeding 2% of GDP on average, largely reflecting the improvement in the goods and services balance.

Over the projection horizon, there are downside risks to activity and upside risks to inflation. The main risks to activity include the impact of monetary policy normalisation, the increase in financial market frictions and the escalation of the conflict in Ukraine. Recent financial market tensions imply additional risks of an uncertain magnitude. In inflation, the main risk stems from domestic pressures, through wages and corporate profit margins and from demand-stimulating fiscal policies.