IMF Executive Board Concludes 2023 Article IV Consultation with Portugal

IMF News, June 22, 2023

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GDP surpassed the pre-pandemic level in the first quarter of 2022 and growth averaged 6.7 percent for 2022.
Growth in Q1 2023 was 2.5 percent (year-on-year).
Growth projections:
- 2023: 2.6 percent
- 2024: 1.8 percent
Inflation dynamics:
- Headline inflation peaked in late 2022; core inflation has been stickier due to limited slack, high profit margins, and tight labor markets.
- Inflation is expected to continue to ease over 2023 but remain above 2 percent in the near term.
Labor market and wages:
- Wage growth has accelerated, partly reflecting minimum wage hikes and labor shortages.
External sector:
- Current account deficit is expected to narrow as terms-of-trade normalize and external demand strengthens.

Fiscal outcomes:
- Fiscal deficit narrowed to 0.4 percent of GDP in 2022, despite new fiscal support measures, mainly reflecting stronger tax revenues.
- Fiscal position in 2023 is expected to be broadly similar to 2022.
Public debt:
- Public debt fell below its pre-pandemic level to 113.9 percent of GDP in 2022.
- Public debt is set to remain on a downward path in 2023 and over the medium term.
Fiscal policy stance and guidance:
- Maintaining a contractionary fiscal policy stance in 2023 is appropriate to build fiscal space and support monetary policy in reducing inflation pressures.
- If growth weakens appreciably, automatic stabilizers should be fully deployed; fiscal overperformance must be saved.
- Further fiscal support should be reserved only for severe downside scenarios and designed to be temporary, non-price-distortionary, and targeted to the most vulnerable households.
Medium-term fiscal reform priorities:
- Revenue-side: simplifying the tax system and eliminating tax distortions, rolling back reduced VAT rates, reinstating carbon taxes, and improving tax administration.
- Expenditure-side: reforms to contain age-related spending pressures from pensions and health care; increase the share of public investment relative to current spending.
- Other: strengthen the medium-term budgetary framework, strengthen the financial sustainability of SOEs, and further improve the social safety net.

Resilience:
- The banking system and household and corporate sectors have been resilient to recent shocks so far.
Emerging risks:
- Tighter financial conditions, amid a buoyant housing market, have increased financial risks.
Recommended financial sector actions:
- Banks and supervisors should maintain vigilance on credit quality, market and interest rate risk, and liquidity management.
- Continuously improving capital headroom is an important safeguard.
- Efforts to contain risks from transnational money laundering should continue.
Residential real estate measures:
- Consider gradually phasing in a sectoral systemic risk capital buffer, holistically calibrated with other macroprudential measures, resolvability cost considerations, and procyclicality avoidance.
- Support housing supply and affordability without generating market distortions to alleviate housing market strains.

Productivity and reforms:
- Structural policies should focus on boosting productivity growth.
- Timely implementation of the NRRP is crucial; NRRP focuses on raising R&D, improving the education system, judicial system and business regulations, and scaling up green investment.
Labor market:
- Reforms to improve labor market performance and dynamism, supported by active labor market policies and skilling and re-skilling workers, would spur private sector-driven growth.
Carbon pricing:
- Receding energy prices provide an opportunity to gradually increase carbon taxes, combined with targeted measures to protect the most vulnerable.
EU funds:
- Efficient planning, budgeting, implementation, and oversight are key to maintaining strong investment absorption capacity of EU funds.

Downside risks:
- Tighter financial conditions potentially accompanied by a sharp correction in housing prices.
- A deeper global or regional slowdown.
- Persistently higher energy prices.
Upside risks:
- Continued strong tourism momentum and a resilient labor market.

Real GDP:
- 2021: 5.5
- 2022: 6.7
- 2023 (Projection): 2.6
Private consumption:
- 2021: 4.7
- 2022: 5.8
- 2023 (Projection): 1.0
Public consumption:
- 2021: 4.6
- 2022: 1.7
- 2023 (Projection): 3.0
Gross fixed investment:
- 2021: 8.7
- 2022: 4.3
- 2023 (Projection): (not listed)
Exports:
- 2021: 13.4
- 2022: 16.7
- 2023 (Projection): 4.4
Imports:
- 2021: 13.2
- 2022: 11.1
- 2023 (Projection): 2.8
Contribution to Growth (Percentage points):
- Total domestic demand:
- 2021: 1.9
- 2022: (not listed)
- 2023 (Projection): (not listed)
- Foreign balance:
- 2021: -0.3
- 2022: 2.0
- 2023 (Projection): 0.7
Resource utilization:
- Employment:
- 2021: 2.1
- 2022: (not listed)
- Unemployment rate (Percent):
- 2021: 6.6
- 2022: 6.0
Prices:
- GDP deflator:
- 2021: 1.5
- 2022: 4.0
- Consumer prices (Harmonized index):
- 2021: 0.9
- 2022: 8.1
- 2023 (Projection): 5.6
Fiscal indicators (Percent of GDP):
- General government balance:
- 2021: -2.9
- 2022: -0.4
- Primary government balance:
- 2021: -0.6
- 2022: 1.4
- 2023 (Projection): 1.8
- Structural primary balance (percent of potential GDP):
- 2021: 0.6
- 2022: 1.2
- General government debt:
- 2021: 125.4
- 2022: 113.9
- 2023 (Projection): 107.9
Current account balance:
- 2021: -0.8
- 2022: -1.3
Nominal GDP (Billions of euros):
- 2021: 214.7
- 2022: 239.3
- 2023 (Projection): 255.3

Source: IMF — IMF Executive Board Concludes 2023 Article IV Consultation with Portugal.