Perspectives

Some fiscal leeway to support the recovery

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
2
1
PORTUGAL  
SOME FISCAL LEEWAY TO SUPPORT THE RECOVERY  
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.  
Despite the easing of lockdown measures, many difficulties have  
persisted this summer. The UK’s government decision to impose –  
between 10 July and 20 August– a quarantine period for travellers  
returning from Portugal has caused further downward pressures on  
GROWTH AND INFLATION (%)  
GDP Growth  
Forecast  
Inflation  
the tourism sector. In July, arrivals were nearly two-thirds below their  
Forecast  
1
8.0  
6.0  
2
019 levels . The same quarantine measure was reintroduced on 10  
6.0  
4.0  
2.0  
0.0  
September. In addition, the resurgence of Covid-19 cases in Spain may  
indirectly impact Portugal’s economic recovery – until the end of this  
year at least – due to the trade connectivity between the two countries .  
2.6  
2
.2  
1
.0  
1.2  
0.3  
2
Unsurprisingly, the impact of the lockdown measures on the labour  
market has been strong: employment fell 3.8% between January and  
July. The jobless rate climbed above 8% in July (8.1%) –its highest level  
since October 2017– while the youth unemployment rate (15-24 years  
old) rose to 26.3%. However, the labour market was already losing  
momentum well before the Covid-19 outbreak. The annual growth in  
employment had been slowing since 2018, reflecting the weakening in  
new job offers (see Chart 2).  
-2.0  
-4.0  
-6.0  
-0.2  
-
8.0  
-
-
10.0  
12.0  
-
9.7  
2
018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: EUROPEAN COMMISSION, BNP PARIBAS  
The effects of the current crisis on the public finances should also be  
put into context. The country has improved its budgetary position over  
the past decade and posted a surplus of 0.2% of GDP in 2019. The  
public deficit will be substantial this year, but should remain close to  
3
NEW JOB OFFERS  
Unity (seasonally-adjusted data)  
the level recorded in 2010 . The government deficit in 2020 is thus  
likely to be smaller – relative to GDP – than in Spain or France. These  
two countries were still running large structural budget deficits prior  
to the pandemic.  
That said, Portugal’s government debt remains the third highest in  
Europe, behind Greece and Italy. As a share of GDP, public debt climbed  
to 127.2% in Q2. The European Commission now forecasts that the  
government debt-to-GDP ratio will hit 131.6% in 2020, before falling  
back to 124.4% in 2021, as growth rebounds.  
18000  
16000  
4000  
12000  
0000  
000  
6000  
000  
2000  
1
1
Lastly, deflationary pressures are building, reflecting the protracted  
decline in demand. The core CPI (excluding processed foods and  
energy) fell by 0.4% over the last six months (August-February).  
8
4
0
5
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
CHART 2  
SOURCE: NATIONAL STATISTICS, BNP PARIBAS  
1
2
3
According to Portugal’s national statistical office (INE), the number of overnight hotel stays was 1.024 million in July 2020, down from 2.849 million in July 2019.  
Spain accounts for approximately a quarter of Portuguese goods exports..  
Between January and July 2020, the central government’s deficit was EUR8.48 billion, compared with EUR8.90 billion in the same period in 2010.  
The bank  
for a changing  
world  
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