eco TV Week

Portugal: a resilient economy

6/17/2022

So far, Portugal has been generally less affected by the economic repercussions of the war in Ukraine than its European neighbors. The situation worsened this spring, inflation reached 8% in May, leading to a sharp drop in household confidence. Nonetheless, Portugal should be one of the best performing euro zone economies in 2022.

Guillaume DERRIEN

TRANSCRIPT // Portugal: a resilient economy : June 2022

While concerns in the euro zone have increased due to inflation and the tightening of monetary policy, Portugal has seen government bonds yields in Portugal have risen significantly, 10-year rates have gone back up this week above 3%, the highest level for 5 years. Nevertheless, the spread with the German Bund remains lower than what is observed for Spain, Greece, and particularly Italy, which is the country where concerns are currently concentrated.

So far, Portugal has been generally less affected by the economic repercussions of the war in Ukraine than its European neighbors. The energy supply is less disturbed, Russia indeed represents a very limited share of energy imports, around 5% against a quarter on average within the EU. Portugal supplies mainly come from Africa (Angola and Algeria) and the Middle East (Saudi Arabia). GDP also recorded solid growth in Q1 2022 of 2.7% q/q, extending the rebound of 2021. The unemployment rate has also dropped below 6% for the first time in 20 years.

The situation worsened this spring, inflation reached 8% in May, leading to a sharp drop in household confidence. The rise in energy prices for households could ease over the next few weeks, as the government has put in place, since June 15, a so-called tariff shield on electricity prices; this tariff shield is similar to the one introduced in France, and it should remain in place until May 31, 2023, before a probable harmonization of this system at the European level.

Nevertheless, this limitation on electricity prices could be offset by an increase in costs on other expenditure items, in particular food. As Portugal imports a non-negligible part of its food products, it is more exposed to the rise in world prices for essential products such as wheat, or meat. A similar observation applies to manufacturing goods, which are also largely imported

In this context, the government will probably take other measures to protect households, in addition to this tariff shield. A food check for low-income families is envisaged, and it would supplement previous measures such as the rebate on the liter of gasoline or the VAT cut on natural gas.

The rebound in tourist activity will also allow cushion any blow in consumption, and forecasts are indeed counting on tourist attendance higher than that observed in 2019, before the global pandemic. The latest figures for April confirm this impression, with for the first time since the start of the pandemic, hotel activity is higher than during the same month in 2019.

Despite still significant structural weaknesses, linked in particular to the sustainability of its public debt, the Portuguese economy should be one of the best performing euro zone country in 2022. In its June projections, the OECD forecast  on a growth at 5.4% in 2022, which would place the level of activity 1.2% higher than in 2019, a level higher than the average for Eurozone countries.

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