Portugal has spent years enjoying stability and long-term policies that are helping our neighbor to become one of Europe’s gifted students. After recovering from the 2012-2013 debt crisis, Portugal is once again an example for its resilience and ability to recover from major recessions slowly but surely.
The Portuguese economy recovered the GDP levels prior to the covid pandemic months ago, while, for example, Germany has not yet achieved it and Spain will not do so until 2023. In addition, a brilliant first quarter of 2022 has led Portugal to to be the only country that has received after the outbreak of the war in Ukraine, becoming the economy that will grow the most in the entire European Union in 2022.
Portugal recovers pre-pandemic GDP
The Portuguese economy is once again surprising analysts and organizations for good. So much so, that his growth forecast for the Portuguese economy this year (+5.8%) at the same time that he had to cut the GDP of the rest of the countries due to the impact of the war. The IMF, somewhat more cautious and less optimistic, has also raised its forecasts by half a point, to 4.5%.
However, the expert consensus expects growth to be much higher than that forecast. For example, the FocusEconomics panelists see a rise in GDP of 4.6% in 2022, but they acknowledge to elEconomista that there will be a significant upward revision in the next publication. On the other hand, Bank of America (BofA) Global Research forecasts growth of 6.5% in 2022. It seems that the invasion in Ukraine that is putting Europe on the ropes will not be able to appease the recovery of the Portuguese economy.
In this case (regarding the war) the luck factor has played in favor, since “Portugal is one of the countries with the fewest direct trade ties with Russia and Ukraine within the European Union. That said, we must remember that the country is subject to indirect risks in the form of raw material prices, the breakdown of global supply chains and the weakening of global demand”, comments Massimo Bassetti, Senior Economist of the Euro Area at FocusEconomics, in statements to elEconomista.
Strong growth in 2022
But before the war, Portugal was already standing out. In the first quarter of the year, the Portuguese economy grew by 2.6% compared to the previous quarter, placing GDP 1.2% above that registered in the last quarter of 2019, the last quarterly reference prior to the pandemic. In year-on-year terms, the Portuguese economy grew by 11.9%, clearly above the 5.9% of the previous quarter.
This huge jump was due, as Teresa Gil Pinheiro, an economist at CaixaBank Research, explained, “to a higher positive contribution from domestic demand, especially through private consumption, and from foreign demand, which reflects stronger growth in exports of goods and services than imports. The recovery of tourism was an important factor in boosting exports”.
From the CaixaBank research department they emphasize that the first indicators for the second quarter do not show signs of cooling. “The daily activity indicator advanced 10.3% in April and the sentiment indicators have improved slightly compared to March. With regard to supply, the economic climate indicator recovered one tenth in April compared to March, thanks to the improvements in sentiment in industry, services and commerce, which more than offset the worsening sentiment in the construction sector, with less optimism due to the decrease in the order book.In industry, the improvement in confidence down to -1.5 points compared to -4 points in March”, explains Gil Pinheiro.
The economist also highlights that registered unemployment at employment offices fell in March to levels below those of before the pandemic, to a total of 326,251 people. This represents 7,500 fewer unemployed than in March 2019 and a reduction of 5.2% compared to February of this year (–18,000 unemployed). “This fall is explained to a large extent by four sectors of activity: accommodation and catering, real estate activities, administrative and support services, commerce and construction. If we compare it with the levels prior to the pandemic, construction and commerce already register levels lower levels, a behavior that is consistent with the scarcity of labor in these sectors,” he explains. This is not an obstacle for her forecasts to contemplate a slowdown in employment growth due to lower hiring intentions given the worsening of energy costs and raw materials.
The European Commission recognized last week that “with the help of government support plans and economic recovery, the unemployment rate fell to 6.6% in 2021. The unemployment rate improved further and fell to 5, 6% in February 2022, reaching a 20-year low.In addition, the employment rate reached an all-time high in late 2021 and early 2022. It is also fair to say that working hours have not yet recovered, which does not pledge the almost impeccable recovery of the Portuguese labor market.
Why Portugal’s success is due
The labor market is the reflection of an economy that has been doing very well for years. In reality, the miracle began to take shape in the years after the sovereign debt crisis. The conservative government of Pedro Passos Coelho launched an internal devaluation (containment of wages and distributed benefits) that was very painful in the short term, but which allowed the economy to gain competitiveness and grow without generating imbalances.
In a document prepared by the European Commission in 2021, it was concluded that the structural reforms carried out after the sovereign debt crisis achieved a significant strengthening of the Portuguese economy. However, it must be remembered that the reforms already started in part before the crisis and the adjustment program (Centeno/Coelho 2018). Within the framework of the program, more comprehensive reforms were implemented, mainly related to the areas of housing and the urban rental market, streamlining of justice, changes in state-owned companies, greater flexibility in the labor market, and an improvement in the business environment.
Later, the Government of Antonio Costa consolidated these measures and announced several measures that stimulated internal demand, such as increases in pensions or the minimum wage. The previous reforms allowed domestic demand to gain strength without generating large imbalances in the economy. The current account balance has remained relatively balanced, while caused by global factors for which it is difficult to find a domestic solution.
To this we must add a management of the covid crisis that is relatively much more efficient than that of other countries (which allowed GDP and employment to suffer somewhat less than in other southern European countries), such as Spain , the attraction of capital through lax taxation for certain profiles (skilled workers with high salaries, foreign pensioners…), a buoyant housing market and a boom in quality tourism that seems to remain very much alive.
Great business creation
A fact that reveals the good climate for business is the creation of companies. According to the latest data published by Eurostat, the creation of companies in Portugal shot up by 36% in the first quarter of 2022, leading the ranking for all of Europe. The Portuguese economy has already recorded four quarters of consecutive year-on-year growth in the registration of new companies, while the number of bankruptcies has been falling for six consecutive quarters.
However, all these indicators and dream data also have some notes that can be considered negative. The ‘miracle’ of employment mentioned in previous paragraphs could also be related to the massive departure of Portuguese people of working age to other European countries.
The same European Commission report that praised the reforms of the past also notes that “it is indisputable that many young and relatively qualified people left Portugal during the last crises in search of better job opportunities. At the same time, immigration could have been relatively largely by pensioners (attracted for years by favorable taxation for these groups)”. This combination would have helped reduce the unemployment rate in recent years. However, this trend appears to be reversing: “Although the absolute size of the labor force decreased during and after the 2011-2013 crisis, it began to increase again in 2016 due to a combination of demographic factors, better job prospects, and migration.” net”.
With everything and returning to the purest news (the second part of the miracle), the European Commission highlights in its latest report that investment and exports of goods have recovered and are already above pre-pandemic levels. Bassetti explains that “indeed, the Portuguese economy will grow more than the Spanish one and will also present better public accounts. The strong rebound that the Commission expects to materialize in Portugal is the joint result of a more favorable base effect, of greater domestic spending , before compressed, and a tourist industry that is once again raising its head with great force.All this will mean that the growth of Portugal will be located in the forecasts of the European Commission, well above the growth of Spain, with the repercussions that this will have on the collection and the fastest sanitation of the public coffers”.
Absolute fiscal stability
All of the above has its repercussions on public accounts. Everything is related. Strong and balanced growth is noticeable in the labor market. In turn, the employment and growth data result in a collection that allows the deficit to be kept at bay. While in Spain the public deficit will remain close to or even above 5% for some time, the situation in Portugal is very different.
Portugal closed 2021 with a deficit of 2.8% of the Gross Domestic Product (GDP), below the initial forecasts and three points less than the 5.8% registered the previous year, and is confident of ending this year in 1, 9% . On the other hand, the gross debt of the Public Administrations has decreased to 127.4% of GDP in 2021, more than ten points compared to the peak of 139% reached in the first quarter of 2021.
With these data and despite the still very high public debt ratio, the rating agency Fitch has improved the outlook for Portuguese debt to positive. “Portugal has shown superior fiscal performance. The fiscal consequences of the pandemic have been less severe than in most…
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