Portugal: Solid activity, albeit with obstacles ahead
Lisbon: The sentiment indicators have recorded a steady increase over the course of the quarter, and the ESI, published by the European Commission, stood at 107.4 points in June, indicating a robust expansion of economic activity. The economic activity indicators available up to May also paint a favourable picture.
On the consumption side, card transactions (purchases and cash withdrawals) increased by around 7% year-on-year in Q2 (vs. 6% in Q1), while car sales grew by 13.4% (vs. –1.7% in Q1). On the supply side, industrial production recovered in May (+2.6%), after contracting in the opening months of the year (–2.1% in April, –2.3% in Q1). On the foreign trade front, the signals reveal a slowdown since April. In this area, uncertainty and weak growth in Portugal’s main trading partners are likely to continue to put pressure on the outlook for the foreign sector.
This marks the third consecutive month of increases in the headline CPI (2.4% in June vs. 2.3% in May), placing it at the same level as the core index (vs. 2.2% in May). Production prices registered their fifth consecutive year-on-year decrease in May (–3.1%), which should continue to exert downward pressure on consumer prices. On the other hand, employment grew by 2.5% year-on-year in the first five months of the year (vs. 1.5% in the same period of 2024) and reached an all-time high, with 65% of the working-age population employed in Q2. The savings rate, for its part, remains close to its historical peak (12.3% of disposable income in Q1) due to stronger growth in nominal income than in consumption. These factors will continue to support consumption and investment.
In May, there were 3.2 million guests, a 2.6% increase year-on-year. This was also accompanied by growth in overnight stays (+1.3% year-on-year), which was driven mainly by resident tourists, whose overnight stays increased by 5.9%, compared with a slight fall among non-residents (–0.2%). Overall, the sector’s total cumulative revenues in the year increased by 7.9%, despite the heightened uncertainty, a factor highlighted in the latest sector surveys.
The surplus of 0.5% of GDP registered up to May (compared to a deficit of 2.1% to May 2024) is explained by a year-on-year increase of 12.3% in revenues. This increase has been driven above all by social security contributions, as well as by personal income tax and VAT collections, anchored in the strong growth in employment and the positive trajectory of wages, in adition to the reduction of personal income tax and VAT refunds. Without this effect, total revenues would have increased by 10.5% and the budget balance would be in a slight deficit. Meanwhile, expenditures rose by 4.5% due to increased staff costs, current transfers (with pensions) and investment. The slowdown in economic activity and the additional pressures stemming from recent commitments (such as the personal income tax cuts and defence spending) increase the likelihood of the budget balance turning negative in 2025.
