Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Portugal.[1]
Portugal recovered strongly from the successive shocks that hit the global economy since the pandemic. Growth in 2023 continued to exceed the euro area average, driven by strong private consumption, net exports, and investment supported by EU funds. Increasing labor force participation and net positive migration led to higher hours worked while unemployment remains at historically low levels. Inflation has decelerated fast. A large fiscal surplus was achieved in 2023, and public debt was reduced to 99 percent of GDP—a remarkable 36 percentage points of GDP since 2020. The external position strengthened, supported by vigorous exports including tourism, EU funds, and improved terms of trade. Financial stability indicators improved, reflecting a reduction in systemic risks. Growth is projected to remain robust in the near term, and inflation is projected to decelerate further. However, low productivity growth, population aging, and subdued investment remain constraints to higher growth and better living standards over the medium term.
Executive Board Assessment[2]
Executive Directors commended Portugal's remarkable recovery from successive shocks, with economic growth exceeding its pre‑Covid trend and euro area growth, while public debt was impressively reduced. Nevertheless, Portugal still faces long‑standing structural issues from demographic pressures, insufficient investment, and subdued productivity that constrain potential growth. Directors encouraged the authorities to maintain prudent fiscal policy, closely monitor risks in the financial sector, and promote greater productivity and green transition, including through continued leveraging of EU funds.
Directors agreed that the targeted small fiscal surpluses, combined with the ECB's gradual monetary policy loosening, are appropriate to achieve a soft landing of the economy, while a neutral fiscal stance over the medium term would further reduce debt and rebuild fiscal buffers. Careful calibration of the new tax cuts and spending increases, complemented as needed by offsetting measures, will be important. Directors considered that a comprehensive tax reform to simplify the tax system and reduce tax expenditure could generate significant fiscal space for higher public investment. They also underscored the importance of improving spending efficiency and addressing aging‑related spending pressures.
Directors welcomed the decline of systemic financial risks, while calling for continued vigilance, particularly regarding risks stemming from the real estate sector. They encouraged the authorities to stand ready to recalibrate their macroprudential tools as needed. As high interest rates strained borrowers' repayment capacity, Directors welcomed the introduction of sectoral systemic risk buffer for household loans secured by residential properties. They encouraged the authorities to consider introducing a positive neutral countercyclical capital buffer to further strengthen financial stability in potential downturns. Further improvements to the AML/CFT framework will be critical to safeguard the integrity of the financial system.
Directors stressed that reforms are needed to increase productivity and promote a faster income convergence with the euro area. They emphasized that product market reforms, including streamlining regulations at all levels of government, reforms for a more flexible labor market, digitalization, and upskilling the labor force remain key. Directors appreciated the authorities' ambitious targets for the green transition, which could be achieved by continued progress toward carbon tax adjustments, further reducing fuel subsidies, and the planned broadening of the EU emission trading system coverage.
Table 1. Portugal: Selected Economic Indicators |
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(Percent, year-over-year, unless otherwise indicated) |
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Projections |
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2022 |
2023 |
2024 |
|
Real GDP |
6.8 |
2.3 |
1.9 |
Private consumption |
5.6 |
1.6 |
1.7 |
Public consumption |
1.4 |
1.0 |
2.1 |
Gross fixed investment |
3.0 |
2.6 |
3.5 |
Exports |
17.4 |
4.1 |
2.8 |
Imports |
11.1 |
2.2 |
3.3 |
Contribution to Growth |
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Total domestic demand |
4.5 |
1.4 |
2.1 |
Foreign balance |
2.3 |
0.9 |
-0.2 |
Resource utilization |
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Employment |
1.7 |
0.9 |
1.0 |
Unemployment rate (percent, average) |
6.2 |
6.6 |
6.5 |
Prices |
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GDP deflator |
5.0 |
7.1 |
2.8 |
Consumer prices (HICP) |
8.1 |
5.3 |
2.5 |
Fiscal indicators (percent of GDP) |
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General government balance |
-0.3 |
1.2 |
0.2 |
Primary government balance |
1.5 |
3.1 |
2.2 |
General government debt |
112.4 |
99.1 |
94.4 |
Current account balance |
-1.1 |
1.4 |
2.0 |
Nominal GDP (billions of Euros) |
242.3 |
265.5 |
278.1 |
Sources: BdP, Eurostat, INE, Haver Analytics, Portugal's Ministry of Finance, and IMF staff calculations/projections. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
