The IMF predicts Portugal’s economy to grow by 2.6% and inflation at 5.6% in 2023.

The International Monetary Fund (IMF) forecasts the Portuguese economy to grow by 2.6% this year and stabilize around 2% over the medium term, pointing to inflation at 5.6% in 2023.

In a report from the IMF’s Article IV mission to Portugal released on Tuesday, the organization says that after the Portuguese economy grew by 6.7% in 2022, “significantly higher” than the euro area’s 3.5%, “real GDP height [Produto Interno Bruto] it is expected to slow down by the end of the year to an average of 2.6% in 2023, and inflation will fall to 5.6%.”

In an April 11 update of global economic forecasts, the IMF pointed to Portugal’s GDP growth of 1% this year, forecasting an inflation rate of 5.7%. The government forecasts growth of 1.8% in 2023.

“High inflation and tighter financial conditions are weakening the economy,” the IMF says, believing that “higher costs of living should weigh on domestic demand growth, and lower global and euro area growth should dampen export growth,” leading to “stabilization of growth at around 2% over the medium term”.

As energy prices fall, the organization expects inflation to continue to decline, but points out that core inflation, except for food and energy, “should be more resilient due to labor market rigidity and high profit margins.” .

In this context, the IMF recommends that fiscal policy remain “non-expansive this year to preserve fiscal space and support monetary policy” but at the same time be “flexible, shocks happen.”

Given that the fall in energy prices “has provided an opportunity to lift more comprehensive measures and target support to the most vulnerable families,” the agency argues that if growth “weakens significantly, automatic stabilizers should be fully implemented,” avoiding the use of “additional fiscal measures.”

“Additional fiscal support should be reserved only for severe adverse scenarios and should be temporary, non-distorting and targeted,” he argues.

Noting that “recent and subsequent adverse shocks demonstrate the need to create fiscal margins in good times and increase fiscal resilience in the face of unforeseen risks,” the IMF points to “fiscal consolidation coupled with strong growth over the medium term” as “central elements for sustained contraction.” public debt while at the same time maintaining public investment even after the end of EU next generation funds.”

Thus, the IMF mission recommends that the government invest in “measures to increase income in a sustainable manner and improve the composition and efficiency of spending.”

“Tax reforms should be aimed at eliminating distortions, eliminating low VAT rates and rationalizing tax spending. Modernization of the tax system, including the digitization of tax administration, will increase tax efficiency. Higher taxes on wealth will boost incomes and help ease pressure on house prices. Lower energy prices leave open the possibility of higher carbon taxes,” he concludes.

The IMF also advocates “increasing the share of public investment, namely the Recovery and Resilience Plan, in current spending, reversing recent trends.”

He lists as “top priorities” the sustainability of pensions, containment of public sector wage growth, strengthening the financial position and efficiency of the National Health Service (NHS), and further improvements in the direction of social support.

“Structural fiscal reforms to improve public sector efficiency, governance, and the financial sustainability of state-owned enterprises should be continued. Full implementation of the 2015 Budget Framework Law will strengthen the medium-term budgetary framework,” he adds.