The Public Finance Council (CFP) has maintained its 1.2% growth forecast for Portugal’s economy this year, signalling a steep slowdown compared to last year, and cautioned of elevated global uncertainty.

Within the economic and budgetary outlook 2023-2027 report published on Tuesday, the institution chaired by Nazaré da Costa Cabral indicates a slowdown in GDP growth from 6.7% in 2022 to 1.2% this year, the same as the previous forecast.

This situation is in line with the estimate from Portugal’s government, which forecasts GDP to rise by 1.3%.

The CFP added that the forecasts are set within an environment of “high geopolitical uncertainty” due to the war in Ukraine and ongoing inflationary pressures. They were also made before the recent turmoil within the banking sector and the European Central Bank’s (ECB) most recent monetary policy decision.

Although robust economic growth over the past two years has permitted the country to return to pre-pandemic GDP levels, the CFP said economic growth will be more modest until 2027 due to high global uncertainty.

“For 2024 and 2025, a recovery in the growth rate of real Gross Domestic Product to 1.8% and 2%, respectively, is anticipated. In the medium term, under invariant policies, economic activity is expected to converge to values around the growth of potential product (1.7%),” the CFP report stated.

Furthermore, the ongoing war in Ukraine, the price hike of raw materials due to China’s reopening, potential easing of inflation forecasts in the medium term and inflationary dynamics focusing on the less volatile components of the Consumer Price Index (CPI) “could lead to a higher and more persistent inflation rate than that currently considered.”

As a result, the CFP said: “The main central banks may accelerate the normalisation processes of monetary policy, damaging both domestic demands, due to the impact that rising interest rates have on an economy with a high degree of indebtedness such as Portugal’s, and external demand directed at Portugal, due to the slowdown in economic activity of the country’s main trading partners.”