OECD Economic Outlook, Volume 2018 Issue 1

Portugal

GDP growth is projected to remain above 2% in 2018 and 2019. The recovery will continue to be supported by past reforms, favourable external trade and domestic demand conditions. Investment activity will be underpinned by an increase in the absorption of EU structural funds in 2018. Consumption growth will remain solid, reflecting strong employment growth.

The stance of fiscal policy will be mildly expansionary in 2018 before becoming broadly neutral in 2019. This is appropriate given the need to maintain medium‑term fiscal sustainability while not impeding the economic recovery. Productivity‑enhancing reforms that improve skills can reinforce the strength of the recovery. These include further measures to improve the efficiency of the vocational education system and support skill accumulation in general education. The latter would benefit from improved teacher training and better support to students at risk of falling behind.

Domestic and external economic conditions have improved

Economic growth rose in 2017, driven by a rise in both domestic demand and exports. Private consumption activity has been supported by strong employment growth in both manufacturing and services sectors. Improved employment conditions have also contributed to a notable rise in labour force participation. External trade and investment activity have been buoyed by better economic conditions in major Portuguese export markets, especially those within the European Union. Both have also been boosted by recent capacity upgrades in the car manufacturing industry. Abstracting from one‑off factors (including the recapitalisation of a large public bank), fiscal policy exerted a broadly neutral influence on economic activity in 2017.

Sluggish productivity growth undermines the sustainability of the recovery

Public investment will support economic growth in 2018, with the stance of fiscal policy being mildly expansionary and EU structural fund absorption expected to rise notably. While budget deficits have fallen substantially since 2010, public debt remains very high. In this context, the projected narrowing budget deficit is appropriate.

Portugal

Source: OECD Economic Outlook 103 database.

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Household consumption has benefitted from improvements in labour market conditions and a slight easing in the pace of private sector deleveraging. Nevertheless, both consumption and investment continue to be constrained by weak labour productivity growth. The education system could do more to raise skill levels and reduce the link between learning outcomes and socio‑economic backgrounds. For example, there is scope to increase the efficiency of the vocational education system and provide more and individualised support to those students at risk of falling behind.

Portugal. Demand, output and prices

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The government has signalled an intention to undertake tax reforms over the coming years. To the extent that lower‑income households have a higher marginal propensity to consume, mooted reforms that make the income tax schedule more progressive and provide a salary supplement for low income households could support economic activity. Such measures would also promote inclusiveness. Nevertheless, there is scope to increase the share of less distortionary forms of taxation in the tax mix: property taxes play only a small role and there are substantial revenue losses from preferential consumption tax rates.

Growth will ease but remain solid

Growth is projected to ease slightly, but to remain high. Consumption growth will be supported by continued improvements in labour market conditions. A gradual further reduction in economic slack will prompt a moderate increase in inflation over the coming years. A rise in geopolitical tensions that results in significant and sustained upward pressure on oil prices would adversely impact the Portuguese economy given it is a net oil importer. Reversing some aspects of earlier labour market reforms, such as the individual bank of hours, could negatively impact job growth. Negative economic or financial developments could hit the economy especially hard at present given that the high stock of public debt limits the capacity of fiscal policy to respond.