By Sergio Goncalves
LISBON (Reuters) -The Bank of Portugal slightly raised its economic growth forecast for 2025 on Friday but predicted a small budget deficit of 0.1% of gross domestic product because of growing public spending, after an earlier projection of a surplus.
In its year-end economic bulletin, the central bank said the economy should expand 1.7% this year, with growth accelerating to 2.2% in 2025, after 2.1% previously forecast. GDP is expected to grow also by 2.2% in 2026 and then 1.7% in 2027.
It lowered the budget surplus forecast for this year to 0.6% of GDP from 1% projected in October and sharply revised its 2025 forecast to a 0.1% deficit from a 0.8% surplus. The deficit is expected to reach 1% in 2026, still well below the European Union threshold of 3%.
The expected deficits “result from permanent measures already adopted by the government, with an impact on public expenditure and tax revenue”, as well as loans from recovery funds and increased expenditure to ensure the continuity of projects financed by them.
“The public expenditure dynamics are a concern,” Governor Mario Centeno said.
Centeno warned that net public expenditure in Portugal had risen 10.8% in 2024, far above the potential growth of GDP in nominal terms. He said this was not sustainable and should be corrected due to the risk of Portugal not complying with the new European rules.
The central bank said “the greater dynamism of activity over the next two years reflects an improvement in financing conditions, the expected acceleration of external demand and the greater inflow of resources from the EU”.
However, Centeno said the risks were tilted downwards, especially if a larger slowdown materialises in the euro area, and imbalances may arise, particularly budgetary ones, “which are important to take precautions against”.
The bank put Portugal’s euro area-harmonised inflation at 2.1% in 2025, close to the European Central Bank’s monetary policy target, after 2.6% this year.
(Reporting by Sergio Goncalves, Editing by Andrei Khalip and Timothy Heritage)
