Portugal: GDP growth loses steam in the second quarter
GDP reading: A second national accounts release confirmed that the economy slowed to a near halt in the second quarter, growing 0.1% on a seasonally adjusted quarter-on-quarter basis in the second quarter. Q2’s reading was a far cry from Q1’s 0.8% expansion and fell short of the Euro area average. On an annual basis, economic growth was unchanged at Q1’s 1.5% in Q2.
Drivers: The quarterly slowdown chiefly reflected a deterioration in the external sector’s performance, as net trade subtracted 0.4 percentage points from the reading in Q2 after having added 1.0 percentage point to it in Q1. Exports of goods and services increased 0.2% on a seasonally adjusted quarterly basis in the second quarter, which was below the first quarter’s 1.5% expansion. Conversely, imports of goods and services rebounded, growing 1.0% in Q2 (Q1: -0.5% s.a. qoq).
On the domestic front, private consumption growth moderated to 0.2% seasonally adjusted quarter on quarter in Q2 from a 1.0% expansion in Q1. Faster price pressures—particularly for food—paired with downbeat consumer sentiment drove spending on non-durable goods to nearly flatline in the quarter. More positively, public spending returned to growth in Q2 after Q1’s flat reading, rising 0.2%. Moreover, fixed investment bounced back, growing 1.2% in Q2 and contrasting the 3.0% contraction logged in the prior quarter. Rebounding capital outlays in intellectual property, as well as machinery and equipment, underpinned the recovery in investment in the three months to June. As a result, domestic demand contributed 0.5 percentage points to overall growth after subtracting from it by 0.1 percentage points in the prior quarter.
GDP outlook: Our panelists expect momentum to accelerate in the coming quarters from Q2, aided by robust real wage growth and interest rate cuts bolstering domestic demand. That said, our Consensus is for economic growth to slow from 2023’s level over this year as a whole, dragged on by softer increases in fixed investment and exports of goods and services. Economic activity growth should, nonetheless, outpace the Euro area average and the government’s target of 1.5%.
Panelist insight: Analysts at the EIU commented on the political consequences:
“A loss of momentum for economic growth in Portugal will have implications for the 2025 budget vote scheduled for November 2024. The consistent growth of the economy in recent years, well above the growth rate of the euro zone, allowed for a rare fiscal surplus of 1.2% of GDP in 2023, which is forecast to be followed by another 0.3% surplus in 2024. This budgetary headroom, made possible by favourable economic growth, has allowed for extra spending and tax cuts, both by the previous Socialist Party (PS) government and the current minority government, led by Luís Montenegro. However, a slower economy is likely to make budgetary decisions more difficult going forwards.”