Portugal is set to unveil updates on its rate of inflation and trade balance in the week ahead, as fears flare over the U.S.’s proposal to impose additional tariffs on imported European Union goods.

Portuguese economic data is mainly scheduled for release Wednesday, July 10, when the country will provide a final gauge of consumer prices for June, as well as fresh trade balance figures for May.  

Wednesday, July 10

• Consumer Price Index (Final – June)
• Trade Balance (May)

The pace of Portugal’s CPI has been gradually decelerating, with June’s rate having slowed to 0.4 on an annual basis from 0.42 previously, despite rising domestic demand and wages.

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The largest downward contributions to the overall annual rate of change stemmed from lower prices of clothing and footwear, as well as communications. Meanwhile, prices rose most for transports and miscellaneous goods and services, according to Statistics Portugal.

Inflation had also fallen to 0.8% year-on-year in the first quarter of 2019 from 1.2% in the prior year, while core inflation rose only slightly above the headline rate in early 2019.

Against this backdrop, the European Commission (EC) recently highlighted that risks in Portugal are “tilted to the downside” and linked in part to “uncertainties surrounding the macroeconomic outlook.”

Real GDP growth in the nation eased to 2.1% in 2018 from a peak of 2.8% in 2017, which the EC attributed to “an abrupt slowdown” in exports.

However, the EC added that “domestic demand remained solid, particularly private consumption, while investment growth slowed after an exceptional performance in 2017.” The European body said it expects investment and private consumption to “continue supporting growth, offsetting most of the negative impact from external trade.”

Trade factors

With the looming threat of U.S.-imposed tariffs on imported EU goods, the Euro Area may face a protracted economic slowdown, which would likely pose a downside scenario for Portugal’s financial well-being.

Fitch Ratings analysts Kit Ling Yeung and Gergely Kiss noted in late May that Portugal’s “highly open economy leaves it vulnerable to external shocks, and the impact of weak eurozone growth pushed the current account into a deficit of 0.6% of GDP in 2018 after five consecutive years of modest surpluses.”

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Fitch, which affirmed Portugal’s sovereign credit rating at a low-tier, investment-grade ‘BBB’, said it expects a further widening of the country’s current account deficit to 0.7% and 1.3% of GDP in 2019 and 2020, respectively.

Meanwhile, investors have been generally optimistic about the country’s ability to honor its public debt obligations. Spreads on its five-year credit default swaps (CDS) were recently quoted about 26bps tighter over the past three months to just south of 41.5bps.

However, growth in the Euro Area could face further risks of deceleration after the Office of the U.S. Trade Representative (USTR) released Monday a supplemental list of products that could potentially be subject to additional tariffs, including cheese, pasta, olives, and scotch whiskey.

This supplemental list adds around US$4bn worth of duties to an initial list published on April 12, which included tariffs with a trade value of around US$21bn.

The announcement was made in connection with a dispute over aircraft subsidies involving Boeing (NYSE: BA) and Airbus Group (OTCMKTS: EADSY) that date back roughly 15 years. 

The U.S. has already placed levies on European steel and aluminum, which was met with more than US$3bn in retaliatory tariffs by the EU. 

Moreover, further threats by U.S. President Donald Trump to impose tariffs of as much as 25% on imported EU autos would likely further damage Europe’s struggling auto industry – notably countries such as Germany and France, which are among Portugal’s top importers.

Sideways stocks

Against this landscape, Portuguese equities appear to be suffering from the cautious tone being set by the slowdown in growth across the broader European continent.

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The Global X MSCI Portugal ETF (NYSEARCA: PGAL), for example, which includes among its top holdings electric utility EDP-Energias de Portugal (OTCMKTS: EDPFY), natural gas giant Galp Energia (OTCMKTS: GLPEY) and food distributor Jerónimo Martins (OTCMKTS: JRONF), has basically moved sideways since its 52-week low set on December 28, 2018.

The ETF had plunged almost 24.5% from its latest 52-week peak in July 2018 to its December trough and has only retraced roughly 6.5% of that value since that time.

Investors will likely be watching trade-related developments unfold across the EU, as well as China, along with any further dovish shifts in global central bank policies, incoming economic data, and news of geopolitical risks, for further insights into Portugal’s economic health and financial well-being.

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