Economic and Fiscal Outlook 2024-2028

Macroeconomic outlook

The CFP's no-policy-change projection anticipates a slowdown in economic activity to 1.6% in 2024 (2.3% in 2023), followed by a recovery to 1.9% and 2.1% in 2025 and 2026, respectively.

CFP Macroeconomic Scenario (change, %)

	2023	2024	2025	2026	2027	2028
Gross Domestic Product	2.3	1.6	1.9	2.1	2.0	2.0
Private consumption	1.7	1.4	1.8	2.1	2.0	2.0
Public consumption	1.0	2.2	1.3	1.4	0.8	1.2
GFCF	2.5	3.6	5.6	5.2	2.9	2.6
Exports	4.1	2.8	2.5	2.2	2.2	2.2
Imports	2.2	3.0	3.6	3.5	2.4	2.3
Domestic demand (p.p.)	1.4	1.7	2.4	2.7	2.1	2.1
Net exports (p.p.)	0.8	-0.1	-0.5	-0.6	-0.1	-0.1
Unemployment rate (% labour force)	6.5	6.4	6.3	6.2	6.1	6.0
Employment	0.9	0.3	0.1	0.0	0.0	-0.1
Net lending (% GDP)	2.6	3.3	2.3	2.3	0.9	0.8
Trade balance (% GDP)	0.8	0.8	0.5	-0.1	-0.1	-0.1
GDP deflator	7.1	3.0	2.4	2.2	1.9	2.0
HICP	5.3	2.6	2.2	2.0	1.9	1.9
Output gap (% potential output)	1.3	0.8	0.5	0.4	0.3	0.3

Sources: CFP Projections (2024-2028) and Statistics Portugal (2023).

This scenario is conditioned by the international climate of uncertainty, due to the resurgence of geopolitical tensions on a global scale and, in particular, the military conflicts in Ukraine and the Gaza Strip. For the time being, the impact of these wars has already led to the downward revision of projections for the Portuguese economy's main partners, especially in the Euro Area (EA), thus penalising the external demand growth directed to the Portuguese economy. On the other hand, the ECB's recent monetary policy decisions to maintain interest rates at its current high levels, despite the expectation that they may begin to fall during the second half of the year, should continue to restrict domestic demand, namely by postponing investment and consumption decisions and promoting greater household’s savings for precautionary reasons. The expected acceleration in the absorption of funds associated with the Recovery and Resilience Plan (RRP), whose implementation should reach its peak in 2026, is mitigating these constraints as well as the maintenance of a downward trend in the inflation rate towards the ECB's monetary policy objective (target inflation rate of around 2% in the medium term), which will benefit households' real disposable income and, consequently, their consumption levels. In the medium term, and in the absence of additional shocks, the Portuguese economy is projected to grow by 2.0% in real terms.

For the labour market, the pace of job creation is expected to fall to 0.3% in 2024, followed by a gradual convergence to a marginally negative figure (-0.1%) at the end of the projection horizon, in line with the demographic projections incorporated in the technical assumptions. Over the same period, the unemployment rate should maintain a downward trend, falling to 6.4% of the labour force in 2024 and to 6.0% in the medium term.

With regard to prices, the CFP projects a gradual reduction in the inflation rate, measured by the rate of change in the Harmonised Index of Consumer Prices (HICP), throughout the projection horizon, to 2.6% in 2024 and 1.9% from 2027 onwards. This should reflect the continued slowdown in food price growth as well as the impact of the monetary policy tightening on the economy. It should be noted that in 2024 this process of decelerating inflation in Portugal should be partially mitigated by the resurgence of inflationary pressures in energy products, by the base effect resulting from the end of the zero VAT measure (especially from April), as well as by the substantially slower deceleration in the services component, which persists at high speed.

Fiscal Outlook

The medium-term fiscal scenario, assuming the policies in force are maintained, points to the persistence of budget surpluses until 2028, albeit smaller than in 2023, in a period in which the economic climate will benefit the budget balance less and interest charges will continue to increase public spending. The implementation of the RRP, which had a marginal impact on the budget balance until 2023 due to the fact that it was almost entirely financed by subsidies from the European Union, will have a negative impact on the budget balance until 2026 due to the increasing use of the RRP's loan component.

After a budget surplus of 1.2% of GDP in 2023 (1.7% of GDP if adjusted for one-off operations), a surplus of 0.5% of GDP (0.6% of GDP if adjusted for one-offs) is expected for 2024 under no-policy-change scenario. This surplus reduction reflects the slowdown in economic activity and the impact of approved policy measures to improve the incomes of households, young people, and pensioners. The surplus is projected to increase to 0.6% of GDP in 2025, mainly as a result of higher economic growth. The 2026 outlook anticipates a balance close to equilibrium (0.1% of GDP), affected by the expenditure financed via RRP loans, representing 0.8% of GDP, according to the reprogramming carried out. In the last two years, as a result of the dissipation of the effect of these loans, the budget surplus is projected to improve to 0.8% of GDP in 2027, stabilizing in the following year. The primary balance, which excludes interest charges, points to an average primary surplus of 3% over the projection period, sufficient to accommodate the increase by 0.2 p.p. in the share of interest charges up to 2.3% of GDP.

In line with the budget balance projected evolution, the structural balance trajectory, which removes the economic cycle effect and one-off operations effect, points to an overall positive position, above the medium-term objective.
The CFP's projection for the public debt ratio to GDP points to a decrease of 19 p.p. of GDP between 2023 and 2028, falling close to 80% of GDP. This trajectory will be determined by primary surpluses and a favourable dynamic effect, albeit smaller than in 2022-2023, due to the smaller contribution of the price effect. Thus, if smaller primary surpluses were to be achieved, there a smaller reduction in the government debt ratio would be achieved. In any case, the ratio will remain above the reference value of 60% of GDP.

A sensitivity analysis by altering the costs of the new financing by 50 basis points in each of the years of this period points to an impact on the public debt ratio at the end of the projection time horizon of 0.4 p.p. of GDP. The contained impact is the result of the relatively long maturity of the public debt stock, which in February 2024 had an average residual maturity of 7.7 years.

CFP Fiscal Scenario (% of GDP)

	2023 Statistics Portugal	CFP Projection
	2023 Statistics Portugal	2024	2025	2026	2027	2028
Total revenue	43.5	43.8	44.1	44.0	42.8	42.2
Tax and contributions revenue	37.5	37.5	37.4	37.3	37.2	37.1
Tax revenue	25.2	24.9	24.8	24.8	24.8	24.8
Social contributions	12.3	12.6	12.6	12.5	12.4	12.3
Non tax and non contributions revenue	6.0	6.3	6.7	6.7	5.6	5.1
Primary expenditure	40.2	41.0	41.2	41.6	39.7	39.0
Current primary expenditure	36.3	36.9	36.7	36.6	36.1	35.9
Capital expenditure	3.9	4.1	4.5	5.1	3.6	3.1
Primary balance	3.4	2.8	2.9	2.3	3.2	3.2
Interests	2.2	2.3	2.3	2.3	2.3	2.3
Total expenditure	42.3	43.3	43.5	43.9	42.0	41.4
Headline budget balance	1.2	0.5	0.6	0.1	0.8	0.8
Adjusted budget balance from one-offs	1.7	0.6	0.6	0.1	0.8	0.8
Public debt	99.1	95.3	91.3	87.8	83.9	80.1

Sources: Statistics Portugal, 1st notification of March 2024 of the Excessive Deficit Procedure, CFP projections and calculations.

Risks and factors not considered in the no-policy change projection

As in previous reports, the CFP's current macroeconomic scenario was carried out in a context of high uncertainty, although the risks are globally balanced. External downside risks to economic activity include those related to maintaining a restrictive monetary policy for longer than currently anticipated, as well as the rise in the price of energy raw materials and the disruption of global distribution chains due to a possible intensification of conflicts in the Middle East and Ukraine. At the domestic level, the possible failure to pass the legislation necessary to authorise RRP disbursements, due to the new parliamentary framework, could compromise the projected GFCF. On the other hand, faster easing of the ECB's restrictive monetary policy, as well as a reduction in international geopolitical tensions, will constitute upside risks for the current macroeconomic scenario.

The main risk to the fiscal scenario is the unstable global economic situation. A more pronounced deterioration will lead, via automatic stabilisers, to an unfavourable deviation in the projected path for the budget balance. As this is a projection exercise based on the assumption of a no-policy change scenario, it can under no circumstances be interpreted as a forecast. On this basis, it does not take into account the possible implementation of new economic policy measures with significant financial impacts. Of particular note is the impact on public finances of: (i) major public works projects (e.g. the new Lisbon Airport or, on the railway, the introduction of high-speed rail); (ii) a possible response to wage demands from the security forces and primary and secondary school teachers, and (iii) the adoption of new policy measures aimed at reducing the tax burden and strengthening support for lower-income pensioners.

Additional budgetary pressures are also identified, namely: (i) compensation of employee pressures, including supplements, in various civil service careers; (ii) social benefits, namely pensions, and public health expenditure, in a context of the structural ageing of the Portuguese population; (iii) defence and security expenditure; (iv) the risk of contingent liabilities materialising in expenditure; (v) the impact of extreme weather events such as severe drought and the risk of forest fires. In the opposite direction, i.e. with a positive effect on the budgetary path compared to what is now anticipated, are: (i) higher elasticities of tax and contributory revenue; (ii) a more moderate increase in social spending; (iii) higher dividends from public companies, particularly in the financial sector, outside the General Government perimeter; (iv) lower execution of nationally financed public investment; (v) lower interest charges, in the event of a more favourable public debt path.

Date of last update: 09/04/2024