Economic and Fiscal Outlook 2024-2028 (update)

Macroeconomic outlook

Based on available information, the Portuguese economy is expected to grow by around 2% on average until 2028. After slowing down to 1.8% in 2024, growth is projected at 2.4% in 2025 and 2.1% in 2026. This performance will be driven by an  acceleration of public investment, especially through the implementation of the Recovery and Resilience Plan (RRP). Policy measures with an impact on household disposable income will contribute to the dynamism of private consumption in 2025.

CFP Macroeconomic Scenario (change, %)

Source: CFP own projections (2024-2028) and Statistics Portugal (2023).

The end of the RRP will have a significant negative impact on investment in 2027, especially in its public component (and also on public consumption). The rate of public investment is therefore expected to fall from 4.1% in 2026 to 2.9% of GDP in 2027. This reduction explains the slowdown in GDP growth from 2.1% in 2026 to 1.6% in 2027. In 2028, real GDP growth is expected to recover to around 2%.

Price growth is expected to slow down over the projection horizon. In 2024, the GDP deflator will still grow at a high rate, as a result of gains from terms of trade that will benefit nominal GDP growth, which is quite relevant for calculating the budget ratios. Inflation, as measured by the harmonised index of consumer prices (HICP), should also decelerate to 2.7% in 2024 and 2.2% in 2025, stabilising at around 2% from 2027 onwards. The slowdown in price growth will be influenced by the ECB monetary policy and the reduction in inflationary pressures associated with energy raw materials and food prices.

The projected growth is also based on the labour market resilience, despite demographic challenges. Even with a slowdown in economic growth in 2024, a higher rate of job creation is projected in 2024, supported, among other things, by an increase in the labour force and the participation rate. However, in the medium term, demographic constraints are expected to limit employment growth, leading to null employment growth by the end of the projection horizon. The unemployment rate is expected to fall from 6.5% in 2024 to around 6.0% in 2028.

Fiscal Outlook

Compared to the April projection, the CFP has revised the 2024 budget balance  upwards, and a budget surplus of 0.7% of GDP is now projected. This revision (by 0.2 p.p. of GDP) is the result of a better performance of tax and contributory revenue as well as dividends, which more than offsets the impact of the new policy measures and the updated impact of measures that  address the inflation and the geopolitical shocks. However, adjusting for one-off effects in 2023, the balance in 2024 is expected to fall by 1 p.p. of GDP, reflecting the impact of the economic policy measures approved both in the State Budget for 2024 and throughout the year of  2024.

CFP Fiscal Scenario (% of GDP)
 

Sources: Statistics Portugal and CFP own calculations.

In the medium term, for the period between 2025 and 2028, the outlook points to budget surpluses (0.4% of GDP at the end of the horizon), although lower than projected in April, as a result of the impact of the measures approved in the meantime.

In a no-policy-change scenario, the trajectory of the budget balance will be primarily driven by the increasing use and subsequent decline of RRP loans until 2026, in a period when the economic climate should be less favourable to the budget balance and interest charges will continue to increase public spending. The primary balance, which excludes interest charges, will remain in surplus throughout the projection horizon, above 2.5% GDP on average.

In line with the projected evolution of the budget balance, the trajectory of the structural budget balance, which removes the effect of the economic cycle and one-off operations, points to an overall positive position, pointing to the fulfilment of the common margin of resilience provided for in the reform of European governance. Net expenditure, which will become the main operational indicator on which budgetary surveillance will be based, will show an average growth rate of 4.2% between 2025-2028. This rate of no-policy-change nominal growth net expenditure is above the average nominal potential growth rate of the Portuguese economy for the same period (3.6%), according to the European Commission's Spring forecast. This situation shows limited scope for further increases in expenditure or reductions in revenue without compensatory measures, although the relevant point of reference will be the expenditure trajectory approved by the Council of the European Union.

This projection does not include the impact of the change to the Youth PIT scheme announced by the government but not yet approved. According to the simulation exercise carried out by the CFP, there would be a downward revision of the balance by 0.3 p.p. of GDP from 2025 to 2028, implying a return to a deficit situation in 2026 (0.2% of GDP).

Public debt is projected to stand at 78.3% of GDP in 2028. This is a decrease of 20.8 p.p. of GDP compared to 2023. This trajectory will be determined by primary surpluses and, to a lesser extent, by a decreasing favourable dynamic effect, as the result of a lower contribution of the price effect. A sensitivity analysis to changes in the costs of new financing by 50 basis points in each of the years of this period points to a reduced impact on the public debt ratio of 0.4 p.p. of GDP at the end of the projection time horizon. This impact is limited due to the relatively long maturity of the public debt stock, which in July 2024 had an average residual maturity of 7.7 years.

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

The projections presented in this report are set against an external backdrop of high uncertainty, including significant geopolitical tensions associated with the fragmentation of world trade and armed conflicts, the risk of volatility in the financial markets, namely due to a different than anticipated evolution of inflation and consequently of monetary policy, and, more gradually, the risks associated with climate change and the deterioration of natural capital. Domestic demand, on the other hand, may surprise on the upside, in case households show a higher propensity for consumption, combined with high savings rates, interest rate cuts and fiscal policy measures with a positive impact on income. Overall, therefore, the risks are considered to be broadly balanced for both growth and inflation.

Macroeconomic uncertainty is also the main risk for the fiscal scenario. In addition, there are factors that could affect the CFP's projection, particularly in relation to the quantification of economic policy measures. In particular, expenditure may be underestimated with regard to personnel and health, due to the lack of complete and sufficient information regarding wage agreements and the Health Emergency and Transformation Plan. On another level, there are major public works, such as the New Lisbon Airport, the high-speed railway line or the Oriental Hospital in Lisbon, which also raise uncertainties, especially in terms of funding and risk sharing.

The projection does not take into account additional fiscal pressures on spending on social benefits, health, defence and security, in response to climate change mitigation and adaptation, or any economic policy measures that have not been approved or sufficiently specified. 

In terms of contingent liabilities, the requests for financial restitution in public-private partnerships and liabilities of public companies outside the budgetary perimeter stand out. In contrast, factors that could improve the fiscal path compared to what was anticipated include: potentially higher elasticity of tax and contributory revenue, unanticipated dividends, slower growth in social spending, lower execution of nationally funded public investment and lower interest costs.

Date of last update: 19/09/2024