Caught up by the crisis

EcoPerspectives // 2nd quarter 2020  
Caught up by the crisis  
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.  
Portugal was already in the midst of a gradual but firm economic  
slowdown when it was caught up by the Covid-19 epidemic.  
Although the Q4 2019 rebound in GDP came as a surprise  
- GDP Growth and inflation  
(Y/Y, %)  
GDP Growth  
+0.7% q/q after +0.3% in Q3), the mediocre quality of its  
components confirmed that the economy was running out of steam,  
the first signs of which had appeared last fall), and that the  
business climate was deteriorating. Supported by a strong rebound  
in exports (which is sure to be short lived), the fourth quarter was  
marked by the stagnation of private consumption, a downturn in  
investment and massive destocking, which only amplified the  
slowing of domestic demand, a trend that gradually set in over the  
course of last year.  
The coronavirus epidemic hit Portugal somewhat belatedly. At the  
end of March, the situation was not nearly as disastrous as in the  
neighbouring countries (Spain, France and Italy). The crisis is  
nonetheless poised to intensify in the weeks ahead, although the lag  
has given the Lisbon government some precious time to make a few  
early decisions. After closing schools and certain public spaces, the  
government declared a countrywide state of emergency effective 20  
March, imposing confinement measures that are virtually identical to  
those in France. Portugal closed its borders with Spain, one of the  
epicentres of the epidemic, except for merchandise transport and  
cross-border workers. All air, sea and river travels were suspended.  
Source: National Statistics, BNP Paribas  
possible the impact of shutting down businesses on employment  
and corporate solvency, in order to be prepared for the recovery.  
Portugal’s economic fabric can be characterised by the high density  
of small and mid-sized companies, which means it must be  
particularly careful to minimize the destruction of productive capacity.  
For the moment the government’s economic support plan is built  
around four vectors: 1) vast measures to subsidise partial  
unemployment, which enable workers to preserve up to two thirds of  
their wages in the hardest hit sectors; 2) deferred tax payments and  
social security contributions; 3) a moratorium on capital and interest  
payments for certain bank loans to households (residential) and  
companies; and 4) corporate credit lines provided by banks with  
state guarantees. Initially estimated at EUR 9.2 bn (including  
EUR 3 bn in state guarantees), the cost of these and any additional  
measures will certainly rise in the weeks ahead.  
Like the other European economies, Portugal will now have to  
prepare for a major recession in the months ahead. The downturn  
will apparently be concentrated in the second quarter, followed by a  
rebound, although for the moment, it is hard to foresee its timing or  
size. At this stage, rather than serving as veritable forecasts, our  
estimates mainly provide an idea of the order of magnitude. In Q2,  
we can expect the economy to contract by at least 10% q/q, which  
would bring the decline in full-year 2020 GDP to between 4% and  
Although Portugal still has a very high public debt ratio of just under  
20% of GDP, the country is entering the crisis with solid public  
finances. In 2019, it ended up reporting a fiscal surplus of 0.2% of  
GDP, which it was not targeting until 2020. The fiscal manoeuvring  
room that Portugal has built up so diligently in recent years is about  
to pay off.  
%. We should expect coronavirus confinement measures to be  
accompanied by a major decline in the volume of services,  
especially personal care, retailing, and hotel and food services. The  
impact will not be as severe in other sectors of activity, like  
corporate services, construction and industry, although it will still be  
strong. Portugal has two other weaknesses: the heavy weighting of  
tourism and international goods transport. The epidemic could have  
a major, lasting impact on international tourism and travel, the  
weight of which has more than doubled over the past 10 years and  
now accounts for over 8% of GDP.  
In addition to expenditures linked directly to the health crisis, the  
government has set up a series of measures to mitigate as best as  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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