Portugal's Economic Growth Forecast Raised, But Budget Deficit Looms in 2025

Bank of Portugal Updates Economic Outlook

LISBON - The Bank of Portugal has adjusted its economic projections, raising the growth forecast for 2025 slightly. The central bank now anticipates a small budget deficit of 0.1% of gross domestic product (GDP) due to increasing public spending, a change from an earlier surplus estimate.

In its year-end economic bulletin, the central bank stated that the economy is expected to expand 1.7% this year, with growth accelerating to 2.2% in 2025, up from the previous forecast of 2.1%. The GDP is projected to maintain this growth rate of 2.2% in 2026, followed by 1.7% in 2027.

The budget surplus forecast for this year has been lowered to 0.6% of GDP, down from 1% projected in October, and the deficit for 2025 has been sharply revised from a 0.8% surplus. The expected deficits stem from permanent measures already adopted by the government, impacting public expenditure and tax revenue, alongside loans from recovery funds.

Mario Centeno, the Governor of the Bank of Portugal, raised concerns about the dynamics of public expenditure, noting a significant 10.8% rise in net public expenditure in 2024, far exceeding the potential GDP growth. He indicated that this trend is unsustainable and requires correction to avoid non-compliance with new European regulations.

The central bank's report highlights that the anticipated economic activity over the next two years is attributed to improved financing conditions, an expected acceleration in external demand, and increased EU resources. However, Centeno cautioned that risks are skewed downwards, particularly if a significant slowdown occurs in the euro area, which could lead to budgetary imbalances.

The bank also projected that Portugal's euro area-harmonised inflation will be 2.1% in 2025, aligning closely with the European Central Bank's target, down from 2.6% this year.

(Reporting by Sergio Goncalves, Editing by Andrei Khalip and Timothy Heritage)