Portugal kicks off 2025 with a slight loss of traction in economic activity
Economic activity is showing signs of a slowdown and inflation fell below 2% in March for the first time since August 2024.
These signs are reflected in the performance of synthetic indicators, such as the European Commission’s economic sentiment indicator (which fell from 106.5 in Q4 2024 to 104.4 in Q1 2025) and the daily economic activity indicator (which slowed from 2.2% year-on-year in Q4 2024 to 1.5% in Q1 2025). In the foreign sector, the January data point to stronger growth in exports of goods, although this could be due to increased activity in anticipation of the tariff hikes. In short, the outlook is encouraging for Q1 2025, although signs of cooling are emerging associated with the increase in risks, both internationally and also domestically, following the political crisis which culminated in the fall of the government and the announcement of early elections scheduled for 18 May.
Moreover, the core CPI had not stood below 2% since December 2021. As for industrial prices (–0.4% year-on-year in February), they continue to support the decline in inflation, while the rise in real wages at the end of last year was considerably more moderate (around 3% year-on-year). The data thus appear to be converging towards a normalisation of prices. Nevertheless, the outlook is still subject to risks, particularly a more aggressive escalation of tariff policies and unpredictable effects on energy prices (associated with the ongoing armed conflicts).
Households contributed to this improvement, as their funding capacity increased to 4.7% of GDP, 2.5 pps more than in 2023. This reflects an increase in households savings, thanks to more intense growth in disposable income (10.5%) than in consumption (5.8%). Consequently, the savings rate rose to 12.2%, its highest level since 2004 (excluding the years of the pandemic). Among other agents, the funding capacity deteriorated compared to 2023, particularly in the case of the public sector, which nevertheless still shows a surplus (0.7% of GDP, 0.5 points less), and the financial sector (1.9% of GDP, 0.2 points less). Non-financial corporations saw their funding needs increase to 4.4% of GDP (+0.6 pps compared to 2023) despite sluggish gross capital formation (1.2% year-on-year).
The budget balance once again exceeded expectations in 2024 and registered a surplus of 0.7% of GDP, surpassing both the government’s forecast (0.4%) and that of CaixaBank Research (0.5%). Expenditure growth exceeded that of income, which explains the decrease in the surplus compared to 2023 (1.2% of GDP).
