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Eco Perspectives

Portugal | A stunning improvement in public finances
04/17/2024 • By Lucie BARETTE

After eight years of socialist government, the centre-right Democratic Alliance coalition won the snap general election held on 10 March. This shift in the political landscape, where no party now has an absolute majority in Portugal’s Parliament, could be a source of instability in the country. Nevertheless, the sweeping consolidation of public finances during António Costa’s term, as well as sound macroeconomic fundamentals, give the future government considerable economic and fiscal leeway. Portuguese growth is expected to remain well above Eurozone growth in 2024 (standing at 1.2%, according to the European Commission, compared to 0.7% for the Eurozone).

Eco Flash

Southern Europe: recovery of the public accounts
05/11/2023 • By Guillaume DERRIEN

Public deficits in Greece, Portugal and, to a lesser extent, Spain, dropped significantly in 2022. According to Eurostat’s preliminary results – published on 21 April – the primary deficit nearly halved in Spain (-2.4% of GDP), it was erased in Greece, while Portugal once again posted a surplus (1.6% of GDP). In Greece and Portugal, the public deficit fell below the 3% GDP limit set by the Growth and Stability Pact, with which they had already realigned between 2016 and 2019. Although down sharply, the deficit in Spain remains significant, at 4.8% of GDP.Better-than-expected growth in activity and employment and high inflation generated strong tax revenues, which more than offset the rise in spending to cushion the inflationary shock

Eco Perspectives

A less severe energy shock than elsewhere
09/29/2022 • By Guillaume DERRIEN

With a relatively limited risk of energy shortages, Portugal should record some of the largest economic growth in the eurozone this year. A number of favourable factors are driving these growth levels. There has been substantial carry-over growth from 2021 and real GDP rose sharply in Q1 (+2.4% q/q), before stabilising in Q2. The recovery in tourism has also boosted business activity this summer. Despite the aid measures for households and businesses, which the government estimates are worth EUR 4 billion so far in 2022, there should be a slight surplus on the primary budgetary balance for this year

Eco Perspectives

A more contained inflationary shock
04/14/2022 • By Guillaume DERRIEN

The large victory of António Costa’s Socialist party in February’s legislative elections provides some welcome political stability in the current economic environment. Even though the inflationary shock in Portugal is not as strong as in most of the European countries, and despite support measures introduced by the government, confidence surveys declined sharply in March. It remains to be seen how much this deterioration will alter hiring dynamics. So far, the job market is still on a positive trajectory, with an unemployment rate this winter close to the levels reported in the early 2000s.

Charts of the Week

Non-performing loans remain stable despite moratoria coming to an end
12/14/2021 • By Thomas HUMBLOT

The public and private moratoria granted since the onset of the Covid-19 pandemic to the Portuguese non-financial private sector[1] have, to a very large extent, now expired. The outstanding amount of loans under moratoria stood at EUR3.1 bn in October 2021, from EUR3.6 bn in March 2020 and a peak of EUR46.3 bn in September 2020. Moratoria now cover only 1.5% of outstanding loans to households and non-financial corporations, from 1.9% in March 2020 and 23.5% in September 2020. The expiry of moratoria since September 2021 has not, so far, resulted in a significant increase in non-performing loans[2]. Their outstanding amount (EUR4.0 billion) and ratio (2.0% of loans) have returned to their July 2008 levels

Eco Perspectives

The vaccination campaign is paying off
10/05/2021 • By Guillaume DERRIEN

Portugal’s vaccination campaign seems to be paying off. It is the country that has vaccinated the most people in Europe – and one of the most advanced in the world – with nearly 85% of the population fully vaccinated at the end of September. The number of Covid-19 cases has fallen sharply after a surge in June-July due to the spread of the Delta variant. Portugal’s economic recovery was slower than in most of the other European countries through Q2 2021, in part because it was hit by a more severe wave of the pandemic last winter. However, employment and housing activity have picked up strongly. As in several European countries, new risks have arisen as the pandemic wanes

Eco Perspectives

The worst is over
04/08/2021 • By Guillaume DERRIEN

Portugal was one of the European countries hit hardest by the third wave of the coronavirus pandemic this winter. The government reinstated a “strict” lockdown that drastically reduced the spread of the virus. A very gradual reopening plan was launched on 15 March and will end on 3 May. Hopes for a solid economic recovery hinge on the vaccination campaign currently underway, but like elsewhere in the European Union, it is progressing at a slow pace. The success of the UK vaccination programme nonetheless raises promising prospects for the recovery of Portugal’s tourism sector, which is highly dependent on British tourists. Real GDP could rebound by as much as 5-5.5% in 2021, after contracting by 7.6% in 2020.

Eco Perspectives

Some fiscal leeway to support the recovery
09/30/2020 • By Guillaume DERRIEN

Despite managing well the epidemic, Portugal has experienced a severe economic shock in Q2. Real GDP plunged by 13.9%, pulled down by sharp falls in goods and services exports (-36.1% q/q) and private sector consumption (-14.0% q/q). Investment dropped (8.9% q/q). The country has been heavily impacted by the collapse in tourism inflows and foreign activity, particularly in Spain. External factors could also hamper the recovery, particularly given the surge in new Covid-19 cases in Spain. Nevertheless, the improvement in public finances operated in recent years should translate into a government deficit for 2020 smaller than in other European countries – around 7.0% of GDP according to government estimates. This provides relatively more leeway to support the recovery.

Eco Perspectives

Caught up by the crisis
04/07/2020 •

After what proved to be a rather mild slowdown, Portugal’s GDP growth ended up in the upper range of expectations at 2.2% in 2019. The Covid-19 pandemic will surely erase the country’s enviable performances as whole segments of the economy come to a standstill and the country sinks into a major recession in the weeks ahead. Similarly to its European counterparts, the Costa government is steadily implementing a series of measures to preserve the economic system during the crisis and safeguard the country’s capacity to recover.

Charts of the Week

Portugal: Towards a compression of interest margin on outstanding amounts of transactions with customers?
01/28/2020 • By Thomas HUMBLOT

In a period of declining interest rates, the interest margin on transactions with customers has widened due to greater inertia on the downside of yields on bank assets compared to that of the cost of resources. Portuguese banks, however, hold a large share of variable rate loans which tends to accelerate the downward adjustment of the yield on the loan portfolio. In a context of durably low interest rates and close to zero cost of resources from customers, the sustainability of the interest margin will depend essentially on the ability of Portuguese banks to maintain the current rates applied on new loans[1]. A further decrease in interest rates on new loans would drive the margin on new transactions well below the margin on outstanding amounts

Eco Conjoncture

Banking in a low interest rate environment: the case of Portugal
12/22/2019 • By Thomas HUMBLOT

For the first time since 2010, the five major Portuguese banks returned to profitability in 2018. The main factors behind this swing into profits were a faster decline in interest expense than in interest income, and tight control over operating expenses and the cost of risk. The widening of the net interest margin offset the decline in the outstanding amount of bank loans, increasing net interest income. Other things being equal, the decrease of the interest rates also contributed to the reduction in the cost of risk and the clean-up of bank balance sheets. Although the non-performing loan ratio and outstanding amount were halved, they remain at high levels

Portugal is a small economy within the Eurozone and rely comparatively more on its export. Intra-EU trade is crucial for the Portuguese economy. It accounts for around 70% of Portugal’s exports (mostly Spain, France and Germany), and 75% of its imports.

Despite managing well relatively the epidemic within its borders, the Portuguese economy has suffered strongly from the Covid-19, impacted by the collapse in tourism inflows and foreign activity, particularly in Spain.

During the Eurozone debt crisis, the country lost access to the financial markets and was placed under a European financing and adjustment programme. Painful reforms and fiscal consolidation had borne fruit, as Portugal left the excessive deficit procedure in the summer 2017. Strong and steady economic growth between 2014 and 2019 helped to further address economic imbalances. By the end of summer 2021, economic activity had almost fully recovered from the damage inflected by the coronavirus crisis.

Structural weaknesses and legacy issues from the financial crisis remain (low potential growth, high public and corporate debt, declining but still large stock of non-performing assets). Further public and private debt deleveraging is desirable. Low potential growth, fuelled essentially by low productivity – remains a major obstacle. Addressing these challenges, through higher physical and human capital investment remain a key challenge for the country in the coming years.