Port econ

After years of hard work improving the country’s financial position, the Covid-19 pandemic has shaken Portugal’s economy. However, the country is in a good position to execute its recovery.

Until January 2020, Portugal had marked 25 quarters of uninterrupted growth. Unemployment had fallen to the lowest level since 2004 and the budget was in surplus for the first time in 45 years. Then Portugal identified its first two cases of Covid-19 on March 2, 2020. 

The economic impact of the pandemic that followed abruptly reversed that upward trend, leading to a 7.6% contraction in gross domestic product (GDP) in 2020 — the worst slump since 1936 — with heavy job losses and widespread company shutdowns, especially many small family firms that form the bedrock of an economy that depends heavily on tourism.

But Portugal’s success in recovering from the deep recession and blow to its international standing caused by the European debt crisis a decade ago has built a new resilience into the economy. It is now standing the country in good stead, as it targets a return to pre-pandemic output levels as early as next year.

“We expect to return to a 2019-level of economic activity in mid-2022, as the recovery builds on the international success of the fight against the pandemic, the strengthening of confidence and the support from national and supranational policy measures,” says Mário Centeno, the new governor of the Bank of Portugal — the country’s central bank — who, until June last year, was finance minister in the socialist government. 

The central bank forecasts GDP growth of 3.9% in 2021, rising to 5.2% and 2.4% in the following two years. “Industrial activity has been more resilient and a more rapid recovery is expected [for that sector],” says Mr Centeno. “The upturn in services and, particularly, in activities related to tourism, culture and entertainment will be more gradual.”

Effect of the pandemic

Portugal detected its first coronavirus cases a month later than Italy and Spain — a delay that enabled the government to impose swift lockdown measures. As a result, Portugal suffered proportionally fewer deaths during the first wave of the pandemic than many other European countries. The second wave, however, hit Portugal much harder, resulting in one of the worst surges in the world early this year, leading to the imposition of a tough national lockdown in January that, over time, has helped bring the 14-day infection rates down to one of the lowest levels in Europe by early April.

We believe [the economy] will be strong enough to withstand the winding down of support measures

Paula Carvalho, Banco BPI

“The outlook for the economy continues to be influenced by developments in the pandemic,” says Mr Centeno. “The [economic] recovery that started in the second half of 2020 was temporarily halted, although the impact of the current lockdown has been much smaller than that seen in the second quarter of 2020.”

José Brandão de Brito, chief economist at Millennium bcp, is confident that a recovery is already under way, after a gradual unwinding of the lockdown began in mid-March. “With health restrictions fading, economic activity will surge as private consumption directed at services returns to some kind of normalcy and international supply chains are fully reassembled,” he says. “The full recovery of the Portuguese economy is likely to be achieved in mid-2022, as the impact of the recession is completely digested. Beyond that, we envisage a return to the solid pre-pandemic growth pattern.” The only “wild card”, he says, is tourism. 

Reliance on tourism

Prior to the pandemic, tourism accounted for about 15% of Portugal’s national output and 9% of employment. Last year, however, the sector came close to collapse. The number of people staying in tourist accommodation fell by more than 60%, while overnight stays by overseas visitors dropped almost 75% to 12.3 million. The industry expected to lose about 60,000 jobs in 2020, and TAP Air Portugal, the struggling national airline, had to be bailed out at the cost of 3500 jobs.

Portugal aims to have vaccinated at least 70% of its population against Covid-19 by the end of the summer and envisages reopening the country for tourism for the summer season. But doubts remain over the extent to which foreign visitors will be allowed — or indeed feel safe — to travel.      

Helping hand

Support measures were introduced to mitigate the impact of the pandemic on families and firms — ranging from employment protection schemes to differing tax payments, loan moratoria and state-guaranteed credit lines. “They were essential to avoid further damage to the economy,” says Paula Carvalho, chief economist at Banco BPI. “We estimate that unemployment would have reached double digits if it had reacted according to its historical relation with GDP.” Instead, the joblessness rate increased just 0.3 percentage points, according to the National Statistics Institute, from 6.5% in 2019 to 6.8% in 2020.

Economists are encouraged that the scaling down of a government furlough scheme — from a million workers in the second quarter of last year to 300,000 in January 2021 — has not had a negative impact on employment. “The economy was stronger and healthier at the beginning of this crisis [than] previous crises,” says Ms Carvalho. “We believe it will be strong enough to withstand the winding down of support measures.”  

Rui Constantino, chief economist at Banco Santander Portugal, says the moderate impact the pandemic has had on unemployment, thanks mainly to furlough schemes, has helped avert a decline in family income, meaning that most households can still service their loans. He believes, however, that a more nuanced approach to corporate loans will be required, noting that “because the pandemic affected sectors differently, there will be a need to monitor developments case-by-case, so that conditions can be reviewed where necessary to avoid defaults”.

paula carvalho

Paula Carvalho, Banco BPI

The country’s recovery will be assisted by a large influx of European funds. The country expects to receive close to €14bn in grants from the NextGenerationEU programme aimed at jump-starting European economies. This is the equivalent of 6.5% of GDP in 2019. It is eligible for a similar amount in low-interest EU loans, but the government is expected to borrow only about €2.7bn initially in an effort to add as little as possible to one of Europe’s heaviest public-debt burdens. 

“Portugal was one of the first countries to prepare its EU Recovery and Resilience Plan, and there was an intense discussion with the private sector before it was drawn up,” says Mr Brandão de Brito. “Projects and needs abound and these funds will certainly help to compensate for the limitations placed on public investment over the past decade.”  

Reforms introduced during Portugal’s 2011–2014 economic adjustment programme overseen by the EU and the International Monetary Fund should also help the economy recover from the pandemic and facilitate absorption of recovery funds. In particular, labour market reforms made following the sovereign debt crisis will help workers move more easily between companies.

Average incomes, however, have remained at about 80% of the EU median for the past two decades, while some central and eastern European countries, including the Czech Republic and Slovenia, have overtaken Portugal in this regard. To address this, the government plans to use recovery funds to target low skill levels that weaken labour productivity, as well as the regularity and administrative barriers that hamper growth, and low levels of corporate investment and innovation. 

The coronavirus pandemic has reversed years of hard-won progress in rebalancing public accounts. From the small, but historic budget surplus Portugal recorded in 2019, it swung back to the highest shortfall since 2014 with a deficit of 5.7% of GDP last year. The public debt-to-GDP ratio fell from 132% in 2016 to 117% in 2019, but the fiscal response to the pandemic pushed it back up to 134% last year, which is one of the highest in Europe. 

Even at the cost of derailing years of consolidation, Portugal’s big fiscal effort was seen as unavoidable at such a time of crisis. On the positive side, the cost of servicing its debt has fallen significantly in recent years, as a combination of the European Central Bank asset purchasing programmes and increased market confidence in Portugal’s economic fundamentals have brought down interest rates.   

“The extent of the [2020] recession called unequivocally for a forceful fiscal policy intervention,” says Mr Brandão de Brito. “Portugal was nevertheless one of the most parsimonious eurozone countries in its fiscal response to the pandemic, due to its somewhat fragile public finances. In our view, the deterioration of the public debt metrics is not likely to derail the dynamics of debt sustainability.”


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