The Portuguese economy is running out of steam, inflation weighs on consumption

A waitress removes drinks from a table at a restaurant in Lisbon, Portugal, June 6, 2022. Picture taken June 6, 2022. REUTERS/Pedro Nunes/File Photo

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July 29 (Reuters) – Portugal’s economy lost momentum in the second quarter after a strong start to the year as inflation at a three-decade high weighed on private consumption, official data showed on Friday.

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

Yet net exports of services, including the key tourism sector which accounted for almost 15% of GDP before the pandemic, have increased.

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The INE said the economy grew 6.9% from the same period a year earlier, well below the 11.8% recorded in the previous quarter.

Filipe Garcia, economist at Informacao de Mercados Financeiros consultants, attributed the quarterly contraction in consumption to soaring food and energy prices after Russia invaded Ukraine.

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

The INE said separately that consumer prices jumped 9.1% year on year in July, the fastest pace since November 1992 and from 8.7% in June. Core inflation, which excludes food and energy price volatility, rose 6.2%.

The tourism industry’s rebound from the pandemic will likely offset the impact of higher prices, and the economy is expected to grow significantly further through the year, Garcia said.

“Despite everything, the Portuguese economy continues to be in good shape this year, consolidating its position as one of the most dynamic in Europe,” he said.

The Bank of Portugal last month raised its growth outlook for this year to 6.3% from 4.9% forecast in March, boosted by the return of tourism to near pre-pandemic levels and continued solid growth in private consumption.

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Reporting by Sergio Goncalves and Mariana Ferreira Azevedo, editing by Inti Landauro, Kirsten Donovan

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