Portugal’s economy is losing steam – Inflation weighs on consumption

Portugal’s economy lost steam in the second quarter after a very strong start to the year, with inflation at a three-decade high weighing on private consumption, official data showed on Friday.

The National Institute of Statistics (INE) said in its estimate that the gross domestic product (GDP) contracted by 0.2% in the second quarter of 2022 compared to the previous quarter, when it increased by 2.5%, due to “the negative contribution of domestic demand” – private consumption and investment – to GDP.

However, net exports of services, including the core tourism sector which accounted for nearly 15% of GDP before the pandemic, rose.

INE reported that the economy grew 6.9% year-on-year, well below the 11.8% recorded in the previous quarter.

Filipe Garcia, economist at consultants Informacao de Mercados Financeiros, attributed the quarterly contraction in consumption to rising food and energy costs following Russia’s invasion of Ukraine.

“This not only reduces the confidence of the Portuguese, but also forces them to change their shopping basket,” he said.

The INE said separately that consumer prices rose 9.1% year-on-year in July, the fastest pace since November 1992 and up from 8.7% in June. Core inflation, which strips out volatile food and energy prices, rose 6.2 percent.

The tourism industry’s recovery from the pandemic will likely offset the impact of higher prices, and the economy is still likely to expand significantly during the year, Garcia said.

“Nevertheless, the Portuguese economy continues to be in good shape this year, consolidating its position as one of the fastest growing in Europe,” he said.

Last month, the Bank of Portugal raised its growth outlook for this year to 6.3%, up from 4.9% forecast in March, boosted by a recovery in tourism to near-pre-pandemic levels and steady growth in the private sector. consumption.