The economy grew, essentially, within the limits expected by several economists and institutions in Portugal. But there are those who look with concern at the composition of the recorded growth: among economists there is “surprise” at the evolution of investment, which fell globally compared to the last quarter of last year.

The provisional data from the INE is still scarce in details (it does not specify, for example, how public and private investment evolved), but it already indicates that the growth of the chain—which was 0.7%, the same as the previous quarter— reflected a decrease in the positive contribution of domestic demand, due to the fall in investment and private consumption that accelerated – or continued”dynamic“, in the words of the BIS team of economists.

“This fact is in line with the behavior of consumption indicators, which indicated that this remained resilient“, indicate the economists, in a note analyzing the INE data. On the other hand, they say that they were surprised with the contraction of investment in the chain, which they admit is justified over the months”marked by higher interest rates” it’s a “environment of greater uncertainty associated with the holding of early elections in March.”

“Political uncertainty” caused investments to be “postponed”Pedro Braz Teixeira, director of the research office of the Competitiveness Forum, also told the Observer. “The companies waited to see the results,” but after the elections the parliamentary configuration continues to provide little security, with uncertainty about the approval of the next General State Budgets or the continuity of the Government. “The results are not very reassuring.. And not just the results, it’s what was done with them,” he says, alluding to the AD’s lack of agreement with parties that allow a parliamentary majority. “For investments that were postponed due to political uncertainty, uncertainty has not been resolved”, he adds.

João Borges de Assunção, who leads the NECEP – Forecasting Lab, of the Católica, anticipates: “I think that this year both private consumption and investment could grow a little more than the GDP. This effect is more marked in the case of investment.“.

Paulo Rosa, senior economist at Banco Carregosa, states, for his part, that “high interest rates are gradually beginning to replicate their effects.” unfavorable effects in the disposable income of families and in the treasury of companies, penalize private consumption and investment“. Compared to the same period last year, these two indicators slowed down, but as a result the first gained strength and the second contracted. For this contraction, Braz Teixeira also points to the delays in the Recovery and Resilience Plan (PRR), which the entry into administration of the previous government did not help.

In total, quarter-on-quarter, growth was 0.7%, below the 1.5% increase that was recorded, also quarter-on-quarter, in the first quarter of last year. Pedro Braz Teixeira remembers the “base effect”: “There is a slowdown, but it was expected and inevitable because in the first quarter of last year the chain’s growth was exceptional. It was impossible to get back to 1.5%,” he argues.

Paulo Rosa agrees: “The high GDP base in the first quarter of last year (…) took some shine off the wealth created in the first quarter of this year”, 0.7% quarter-on-quarter and 1.4% year-on-year. For the economist, in the first quarter of this year the economy “continued to show the relative robustness observed in the last quarter of last year.” “In the semester from October 2023 to March 2024 it grew 2.8% in annualized terms,” he points out.

Exports in trouble before European partners recover

According to the INE, as a chain, the contribution of net external demand because the variation in GDP became positivewhich reflected a more pronounced slowdown in imports of goods and services than in exports.

The INE has not yet detailed how the different items (imports/exports of goods and imports/exports of services) evolved individually, but Pedro Braz Teixeira, based on the information available, admits that it was the exports of goods that suffered. “Exports of goods, above all, had already been slowing for many months. They began to recover at the beginning of the year, but very timidly,” he explains.

Besides, “The prices at which we export are falling., which affects the value of exports” and Portugal’s associated economies are not booming either. Although they are recovering compared to the end of last year, and in some cases above expectations, they are showing “weak behavior” and the prospects for year-on-year growth are also weak.

Provisional data for the euro zone, which does not yet include all countries, reveals that GDP increased by 0.4% year-on-year (0.5% in the case of the EU) and 0.3% quarter-on-quarter (the same in the EU). ), which meant that Portugal grew above the average of the Member States with known data. Another good news for the European scenario, which also has implications for Portugal’s trade, is that the euro zone has avoided a technical recession, after two consecutive quarters of contraction.

The economy grew 1.4% in the first quarter year-on-year and 0.7% quarter-on-quarter

Germany, for example, fell again year-on-year (-0.2%), but overall it grew by 0.2% after the 0.5% contraction at the end of the year that had placed it in a technical recession. France also had modest quarter-on-quarter growth of 0.2%, but year-on-year it grew by 1.1%. Spain had the highest growth in the year-on-year comparison (2.4%) and was behind Portugal in the evolution of the chain (0.7%).

“In terms of the composition of growth, the data does not look so good. As a result, we will need to know the details, but we had a slowdown in exports which did not have a negative effect on GDP because imports slowed down even more,” summarizes Pedro Braz Teixeira.

In year-on-year terms, the contribution of net foreign demand to GDP growth was zero, after having been positive in the previous quarter. Exports of goods and services in volume slowed down and imports accelerated “slightly”, according to the INE. Paulo Rosa, from Banco Carregosa, adds that “the unfavorable trend in external accounts has intensified.”

Inflation slows down. Will consumption increase?

The institute reveals that, as a result, the positive contribution of domestic demand decreased, with a Reduction in investment and acceleration of private consumption.. Pedro Braz Teixeira affirms that this acceleration compared to a Christmas quarter, which usually has higher consumption, “is not very surprising because it is in line with the previous quarter.” “The most reasonable explanation is that there has been a change in the discourse of the European Central Bank (ECB) in which there is now, clearly, the prospect of interest rate cuts“, he begins by saying. And this “will create some slack in family budgets.”

Hence, saying that inflation will boost consumption is a leap that Pedro Braz Teixeira prefers not to take. But he admits that private consumption will remain strong. “There are conditions for it to continue to be relatively significant, especially from the second half of the year onwards. In addition to this effect, there is the promised effect of new tax withholdings. It may not be significant, but it may have influence,” she admits. Does this mean that consumption could accelerate? Not precisely. “I needed to see the values ​​better [que serão divulgados pelo INE no final de maio]. Consumption may continue with significant growthIf the values ​​are already very strong, it is difficult for me to accelerate.”

Paulo Rosa, from Banco Carregosa, also understands that the “favorable” behavior of private consumption “supported part of the growth of the last quarter of last year, along with tourism, with this positive trend continued in the first quarter of 2024“. And remember that if the last quarter of last year was marked by Christmas, Easter fell in the first quarter of this year. The two dates “tend to boost family spending.” “Easter does not always coincide with the first quarter, sometimes being in April. The current calendar “It could explain the increase in private consumption in the first quarter, along with the slowdown in inflation and balances at the beginning of January,” indicates the economist.

Paulo Rosa recalls that monthly inflation was negative in January and zero in February, which may explain, in part, “the increase in consumer spending, stimulated by lower prices.” “However, despite the slowdown in inflation stimulating consumption, a significant slowdown in prices could indicate recessionincrease in unemployment and consequent decrease in disposable income and fall in private consumption,” he warns.

For now, he admits it is “likely” that high interest rates “will continue” gradually penalize income available to families, ultimately favoring the increasing reduction in consumption private consumption in the coming quarters, thus penalizing the contribution of private consumption to Portuguese economic growth, reducing its contribution to the formation of the national GDP.”

João Borges de Assunção, who directs the NECEP – Forecasting Lab, of the Catholic University, highlights, for his part, that inflation “remains high and it is difficult to anticipate the evolution of short-term interest rates.”

The INE’s provisional estimate points to inflation in April of 2.2%, a slowdown compared to March. The BPI team of economists say that inflation, despite being below what they anticipated, is in line with the “very gradual normalization” expected to the ECB’s 2% target. The rate cut was “very slight” in April and was “hampered by the base effect on energy products“, since there was a significant price reduction, of 3.2%, in April 2023.

Price increase slows to 2.2% in April

The “most favorable news” on inflation in April is found in core inflation, which excludes unprocessed food products and energy, whose monthly dynamics “was even stronger than the average of recent years before the pandemic, pointing out the drag of the process and possibly confirming that services inflation remains strong.”

However, BPI does not rule out further increases in inflation in the coming months. In fact, “it is foreseeable that in May they will also make themselves felt base effects in the index of unprocessed food products and energy” (in May of last year they fell 2.35% and 1.77%, respectively).

For the BPI team of economists, the data published this Tuesday “confirm the risks” anticipated by the institution. The economy will continue to be “supported by the resilience of the labor market,” they believe, in “investment recovery expectation, which reflects European funds received at the end of 2023 (and those likely to be received in 2024) and channeled to final beneficiaries throughout the year. They recall the “elimination of a certain degree of restrictiveness in the field of monetary policy, with a positive impact on the behavior of financing costs”, but they also see risks, which could limit growth, such as geopolitical tensions, which could affect prices. of basic products and international trade.