Portugal country note: OECD Economic Outlook, May 2021

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Portugal After falling sharply in 2020, GDP is projected to increase by 3.7% in 2021 and 4.9% in 2022. Consumption will strengthen, with a gradual reduction in saving, as the sanitary situation improves and containment measures are phased out. Strong activity in the manufacturing sector and the absorption of EU funds will support investment and exports. Tourism and contact-intensive services will recover only gradually, until the pandemic is fully under control.

Fiscal policy should remain supportive until the recovery is firmly underway, but financial support should target distressed firms that have still viable prospects. Unemployment has increased, especially for low-skilled and young workers, calling for reinforcing the capacity of public employment services to provide job search support and training. Accelerating the implementation of the Recovery and Resilience Plan, while promoting competition-friendly regulation, efficiency gains in public services and green investment, will be key for a strong and sustainable recovery.

The third wave of the virus hit Portugal hard Portugal faced one of the world’s worst surges in COVID-19 infections in early 2021. Hospitals almost reached full capacity, putting pressure on the healthcare system. A second national lockdown was imposed in mid-January for two months. Since March, containment measures have been progressively lifted as the sanitary situation improved. The rollout of vaccination has been constrained by the slow supply of vaccines as in other European countries. About 70% of the population should be vaccinated by August, according to the national vaccination plan.

Portugal Services exports have been particularly weak

The recovery will be gradual

Y-o-y % changes 30

Index 2019Q4 = 100 110 Current growth path

20

Pre-crisis growth path¹

105

10 100

0 -10

95

-20

90 Goods

-30

Services

85

-40 -50

2016

2017

2018

2019

2020

0

0

2020

2021

2022

80

1. The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 based on trend growth in 2021.

Source: National Bank of Portugal; and OECD Economic Outlook 109 database.

StatLink 2 https://stat.link/jzmo2f

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

122 

Portugal: Demand, output and prices 2017

2018

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance3 (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

195.9 126.5 33.7 32.9 193.1 0.9 194.0 83.7 81.7 2.0 _ _ _ _ _ _ _ _ _

2020

2021

2022

Percentage changes, volume (2016 prices)

Current prices EUR billion

Portugal

2019

2.8 2.6 0.6 6.2 2.9 0.3 3.2 4.1 5.0 -0.3

2.5 2.6 0.7 5.4 2.8 0.1 2.8 3.9 4.7 -0.3

-7.6 -5.9 0.4 -1.9 -4.1 -0.6 -4.6 -18.6 -12.0 -2.9

3.7 3.6 2.1 3.7 3.3 0.0 3.3 10.4 9.1 0.3

4.9 4.0 1.3 6.9 4.1 0.0 4.1 9.4 7.1 0.8

1.8 1.7 2.4 1.0 1.3 1.2 0.3 -0.1 0.9 1.0 0.8 0.4 -0.2 0.8 1.0 7.0 6.5 6.8 7.4 7.0 -2.5 -2.1 4.1 1.5 -1.0 -0.3 0.1 -5.7 -4.8 -3.4 137.7 136.4 155.5 155.3 152.1 121.5 116.8 133.6 133.4 130.2 0.6 0.4 -1.2 -1.1 -0.4

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

3. Based on national accounts definition.

Source: OECD Economic Outlook 109 database.

StatLink 2 https://stat.link/mswo84

The virus outbreak stopped the recovery After a sharp rebound in the third quarter of 2020, GDP growth lost momentum. The impact of the second lockdown on activity has not been as strong as the first one, but contact-intensive services have been hit hard again and GDP contracted in the first quarter of 2021. Activity in tourism, which accounts for around 8% of GDP, has been anaemic, with a further contraction of revenues in early 2021. The household saving ratio increased on account of low consumer confidence and mobility restrictions. The labour market has been resilient. Employment declined moderately in the first quarter of 2021. In February 2021, during the lockdown, the number of workers covered by the simplified layoff scheme was about a third of its level in April 2020. However, hours worked and employment among young and temporary workers have dropped significantly compared to pre-pandemic levels.

Policy support should remain strong Fiscal policy is expected to remain supportive in 2021 until the recovery is firmly underway. A package of support measures was announced in March 2021, including tax deferrals, grants to firms in the most affected sectors, new credit lines with state guarantees and the extension of the short-time work schemes until September 2021. The implementation of the Recovery and Resilience Plan that includes EUR 13.9 billion of grants for the 2021-2026 period will gain momentum at the end of 2021, pushing public investment to 3% of GDP in 2022 (from around 2% in 2020). At the same time, policy support to the economy, including the public moratorium on bank loans, will be phased out in the second half of 2021, thereby increasing debt servicing costs and affecting the investment capacity of firms and households.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

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Growth will accelerate if the pandemic is contained Activity is set to pick up with the progressive lifting of containment measures and the recovery of tourism, especially from European countries, during the 2021 summer season. As vaccination accelerates and the EU support starts being implemented, GDP growth is projected to reach 4.9% in 2022. Despite the higher debt and the low level of capitalisation in small firms, private investment will gradually recover, sustained by low interest rates, improving confidence and the absorption of EU funds. The recovery and the phaseout of the COVID-19-related measures will help to reduce the fiscal deficit, but public debt is expected to remain above 130% of GDP (Maastricht definition). The recovery hinges on the capacity to contain the pandemic domestically and in main trading partners, because of Portugal’s high reliance on tourism. A surge of business bankruptcies, notably when the public moratorium will end, could weigh on investment and credit supply by increasing non-performing loans, which are already high by international standards.

The increase of contingent liabilities due to the extensive use of state guarantees poses a risk to future fiscal developments. By contrast, a faster and well-targeted absorption of EU funds could expand economic potential by more than projected by fostering growth-enhancing spending.

The effective use of EU funds is key for a strong and sustainable recovery The high public debt calls for renewed fiscal prudence once the recovery is firmly underway. At the same time, Portugal should seize the opportunity of the Recovery and Resilience Plan to implement structural reforms for stronger, greener, and inclusive growth. A mix of financing instruments, including quasi-equity, participative loans, and non-refundable grants, should be put in place to support credit-constrained but viable firms, especially after the end of the public moratorium. Red tape costs and regulatory barriers to competition should be reduced, in particular in transportation where significant public investments are planned and innovation can help to reduce the sector’s carbon footprint. Support to young people detached from the education system and the labour market needs to be strengthened, notably by reinforcing reachout mechanisms and training measures. The recovery would be boosted if reforms for the modernisation of the public administration are implemented, including measures to foster digital government, to improve the efficiency of the justice system and to strengthen the institutional framework to enhance integrity.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021