LISBON — Portugal’s economy could face a sharper economic slowdown than previously expected due to interest rate hikes by the European Central Bank (ECB), turmoil in global financial markets and geopolitical tensions, the Bank of Portugal said on Wednesday.
Its latest growth forecast for 2023 was 1.8%, already much lower than last year’s 6.7%, which was the strongest expansion in 35 years.
“The balance of risks suggests downward risks to Portuguese economic activity, arising mainly from the impact of the restrictive monetary policy, the increase in frictions in the financial markets and geopolitical tensions,” the central bank said in its mid-year stability report.
The warning came a day after the International Monetary Fund raised its forecast for Portugal’s 2023 growth to 2.6% after a strong expansion in the first quarter, although the Fund said the outlook was extremely uncertain.
The central bank also pointed to many uncertainties and would not rule out that a robust labor market, household savings accumulated during the COVID-19 pandemic and higher corporate margins, as well as the reopening of the Chinese economy, could drive growth to higher rates.
It said turmoil in global financial markets following the failure of several lenders in the United States in March and the forced takeover of Credit Suisse by UBS implied “potential spillover effects between financial and economic cycles.”
Other risks include an escalation of Russia’s war in Ukraine and a deterioration in relations between the U.S. and China.
The central bank said inflation in the euro zone and Portugal was “still high,” though projections pointed to a gradual decline. Euro zone inflation accelerated last month to 7.0% from 6.9% in March, far above the ECB’s 2% target.
It also expected Portuguese banks to “adapt loan conditions to customers’ payment capacity and maintain prudent policies for the constitution of impairments and capital conservation,” adding that the ECB had instruments to support liquidity of the banking sector, if necessary. (Reporting by Sérgio Gonçalves Editing by Andrei Khalip and Mark Potter)