Portugal has returned to growth
After real GDP collapsed by 8.4% in 2020, growth rebounded strongly in 2021 when real GDP expanded by 4.9%, the highest rate in almost three decades. Before the eruption of the Ukraine crisis, the EU Commission had forecast that real GDP would exceed the pre-pandemic level later this year.
The unemployment rate shot up during the Covid Pandemic but remained below that of the eurozone and much below the elevated rates in Italy and Spain. With an unemployment rate of 5.9%, which is below the level before the pandemic, the outlook for Portugal looked good before the Russian attack on Ukraine.
The behaviour of inflation also shows how much progress the Portuguese economy has made since 2013. While inflation in the eurozone has averaged 1.0% since the middle of 2013, it has averaged 0.6% in Portugal and 0.7% in Italy and Spain. Over the last 15 years, this has given Portugal a 6% improvement in relative prices. Nevertheless, there is a clear risk that in 2022 Portuguese inflation will exceed 4% and that it will be much closer to the rate in the eurozone than previously expected.
Vaccination and tourism
The strong recent performance of the Portuguese economy partially reflects the government’s extremely successful vaccination campaign, which has resulted in one of the world's highest rates.The favourable growth outlook is also linked to the expected recovery in tourism, a sector that in 2019 represented 17% of Portugal’s GDP according to the World Travel and Tourism Council. The gradual loosening of Covid restrictions will attract an increasing number of tourists, further supporting recovery from the depressed levels of the last two years.
Activity will also benefit from the large inflows of EU funds in coming years. Portugal has requested grants and loans under the Recovery and Resilience Plan (RRP) worth 8.2% of 2020 GDP. After receiving a disbursement of €2.2 billion last summer, it is estimated that GDP growth will be raised by between 0.5% and 1% per annum until 2025. Furthermore, the full implementation of structural reform projects under the Recovery and Resilience Plan will raise the economic growth potential, boosting public debt sustainability.
Productivity, education and investment
While the Portuguese economy is doing well, from a long-term perspective it is threatened by factors. The first of these is the low level of productivity. One factor that helps explain the productivity deficit is the average level of education of the labour force, which is low in Portugal. A second factor that affects productivity is investment. Figure 10 shows that while eurozone fixed capital formation grew by an average of 0.6% p.a. over the period 2007-2021, it contracted by 0.2% p.a. in Portugal and by 1.0% p.a. in Italy and Spain.
Conclusion
While being severely hit by the Global Financial Crisis and the subsequent fiscal crisis in the eurozone, Portugal has made excellent progress in returning to growth. However, challenges remain. The short-term outlook is clouded by the uncertainty stemming from the global macroeconomic repercussions of the Russian attack on Ukraine. In the longer-run, the economy faces serious structural long-term issues related to low productivity, low educational attainment and too little investment. Overcoming these difficulties should be on top of the government’s policy agenda.
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