Portugal: 2025 starts poorly, but the macro outlook is still supported by structural factors
The growth of domestic demand (+0.1% quarter-on-quarter vs. –0.7% in the previous quarter) reflects significant differences between its components. Private consumption fell 1.1% in quarter-on-quarter terms (vs. +2.8% in the previous quarter), after registering a rebound in Q4 2024 associated with the increase in disposable income due to the changes in fiscal policy. Investment, on the other hand, rose by 3.8% as a result of a significant accumulation of inventories. This more than offset the contraction of gross fixed capital formation (–2.5% vs. –0.9% in the previous quarter) associated with the heightened uncertainty in Q1, both in the international context (in a period marked by the «anticipation of tariffs») and also domestically (with the emergence of the political crisis that culminated in the elections in May). Foreign demand deducted around 0.7 pps from GDP, due to a 0.4% drop in exports and a 1.0% increase in imports, a dynamic that was also associated with firms purchasing goods in advance in anticipation of the change in US trade policy. Employment, meanwhile, once again broke a new record in Q1, with a total of 5,181,400 people. This represents a 2.4% year-on-year increase (0.6% quarter-on-quarter), which is even more significant when compared to the historical data for Q1.
The data for Q1 reflect a correction in economic activity, rather than a sudden slowdown, following the strong growth recorded in the previous quarter. In fact, analysing the quarters together in order to reduce the noise associated with temporary factors, we find that the average quarter-on-quarter growth rate was 0.45% – although this represents a slowdown compared to the historical average (0.6% since 2015), it is still a buoyant growth rate. Even so, given its magnitude and the knock-on effect it will have on the rest of the year, the decline in Q1 will lead to a mechanical reduction of 0.9 pps in the growth forecast for 2025 as a whole. In addition, the uncertainty associated with US trade policy will have a more negative effect than previously anticipated. On the upside, some factors will support growth throughout the year, such as a further reduction in interest rates, lower energy prices and an accelerated in the execution of NGEU funds. In this context, we have revised our GDP growth forecast to 1.7% (down from 2.4%) for this year and to 1.9% for 2026 (vs. 2.1% previously).
In May, both headline and core inflation rose again, with both standing at 2.3% (for the third consecutive month they are equal). This illustrates a disinflationary process that is now less volatile but also somewhat slower due to the rigidity of some sub-components in services (such as education and health, with more persistent inflation rates of around 3.5%). On the food and energy side, the upward surprise in food prices was offset by the fall in energy prices. Amid more benign price dynamics and a downward revision of the GDP forecast, we have adjusted our inflation forecast for 2025 slightly downwards (from 2.2 to 2.1%).
