OECD Economic Outlook, Volume 2019 Issue 1

Portugal

Economic growth is projected to remain stable, at 1.8-1.9% in 2019 and 2020. Private consumption will continue to rise in response to persistent employment growth and, more recently, wage increases. Business investment growth should remain robust, on the back of strong corporate profits and accommodative financial conditions. Nonetheless, export growth will slow amid weakening economic activity in Portugal’s major trading partners.

Fiscal policy will modestly support economic growth in 2019 and 2020. Nevertheless, public debt reduction should continue to be prioritised, partly through introducing new productivity-enhancing policy changes. Existing regulations in some sectors, including professional services and transport, should be reformed to reduce the cost of intermediate inputs used by businesses. At the same time, reforms to the judiciary and the vocational education and training system should be further pursued.

Consumer spending has been driven by improved labour market conditions

The economy continues to expand rapidly, with employment growth and rising real disposable incomes supporting private consumption. While export growth softened in late 2018, this partly reflected industrial action at the Port of Setúbal in November and December that temporarily restricted automobile exports. Imports have been rising strongly, especially of machinery and equipment. Industrial and consumer confidence remain at high levels relative to the 2014-16 period, but have eased slightly since mid‑2018.

Private consumption and confidence: Portugal

Source: OECD Economic Outlook 105 database; and European Commission, Economic Sentiment Indicator.

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Portugal: Demand, production and prices

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Domestic factors are supporting growth

Fiscal policy is expected to support economic growth in 2019 and 2020. The deep temporary cuts to public sector wages at the height of the crisis have now been reversed, public employment is rising again and new changes to tax and benefits policies will support disposable income growth. Investment activity will be bolstered by increased absorption of EU funds over the next few years. Reviving public investment projects with high economic returns is key given Portugal’s rapidly ageing population and sluggish productivity growth.

Financial conditions in the business sector have improved: return on equity has increased over the past few years, especially for small and medium enterprises, and borrowing costs continue to decline. Following a sustained period of corporate deleveraging, businesses are now in a good financial position to undertake new investment projects.

New productivity-enhancing reforms could further reduce costs for businesses. Various professional services are both strictly regulated and represented by the same professional association. Independent supervisory bodies should be established that approve any new regulations that they propose. At ports, concession contracts can be awarded that give exclusive rights to private contractors of port services. However, these are often excessive in their duration, reducing the potential for market entrants that can provide higher quality services to Portuguese enterprises.

Economic growth is projected to remain solid

GDP growth is projected to be 1.8% in 2019 and 1.9% in 2020, with continued improvements in labour market conditions supporting private consumption. A gradual further reduction in economic slack will prompt a slight increase in inflation over the coming years. Economic growth in export markets such as Spain, Germany and the United Kingdom is expected to slow, providing a headwind to export growth.

Risks to the outlook include a tightening of financial conditions. In particular, an increase in market interest rates may dent business and household spending and lead to an increase in the stock of non‑performing loans on bank balance sheets. On the upside, further improvements in the competitiveness of Portuguese exports could result in larger gains in export market share.