Portugal Economic Forecast

A third release confirmed that the economy flatlined in quarter-on-quarter terms in Q2, having expanded in Q1. A sharper contraction in fixed investment amid higher interest rates and a downturn in exports due to a weaker global economic environment more than offset solid consumer spending. The economy likely returned to growth in Q3 amid improved consumer sentiment in July-August compared to Q2. That said, the temporary closure of a large Volkswagen factory and the slow absorption of EU funds will keep momentum subdued. Meanwhile, in early September, the government announced that it would extend the zero VAT rate on basic food items until year-end in a bid to support household purchasing power. Also in early September, S&P Global Ratings raised the country’s outlook from stable to positive, while keeping its rating at ‘BBB+’, citing a declining debt-to-GDP ratio and steady economic growth.

Harmonized inflation rose to 5.3% in August from July’s 4.3%. The acceleration was driven by a softer decline in housing and utilities prices and a rebound in transportation inflation. Inflation should continue to fall this year and next, restrained by rising interest rates and weakening economic activity.