OECD Economic Outlook, Volume 2019 Issue 2

Portugal

Economic growth is projected to edge down to 1.7% by 2021. Consumption growth will soften due to lower wage growth. Export growth will be sustained by competitiveness gains despite challenging external conditions. The absorption of EU structural funds will sustain investment. Inflation is expected to remain low. Unemployment is projected to decline slightly.

The fiscal stance is expected to be broadly neutral in 2020-21, which is appropriate given the absence of economic slack, and the public debt-to-GDP ratio will continue to decrease. Structural policies could help boost productivity growth further. A more streamlined regulatory environment, stronger product market competition – especially in professional services and network industries – and improved skills are key in that respect.

Domestic demand is the main driver of economic growth

Economic activity remained dynamic in the first half of the year. Private consumption has benefitted from tight labour markets modestly pushing up wage growth, and from weak inflation. Domestic demand has also been boosted by strong business investment. Export growth has softened slightly and industrial confidence has deteriorated in the second half of the year, reflecting rising uncertainty about external conditions and trade tensions. However, confidence indicators for services, consumers and construction have stabilised, indicating some resilience to negative external developments.

Labour market and fiscal balance: Portugal

1. Maastricht definition.

Source: OECD Economic Outlook 106 database.

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Portugal: Demand, output and prices

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Fiscal consolidation will reduce public debt

Fiscal policy is expected to remain prudent with a nearly balanced budget in 2019‑21, which equates to a broadly neutral fiscal stance. The public debt-to-GDP ratio is set to keep declining. Increasing public spending efficiency will support the build-up of fiscal buffers to address unanticipated shocks and the fiscal impact of an ageing population.

Financial conditions are expected to remain accommodative. On the supply side, banks have made significant progress in strengthening their balance sheets and reducing the stock of non-performing loans, supporting credit growth and consumption. On the demand side, after a period of corporate deleveraging and improved profitability, businesses are undertaking investments on the back of low interest rates and high capacity utilisation.

Improving judicial efficiency and reducing judicial backlog, as well as reducing regulatory barriers in network industries and professional services remain crucial to stimulate productive investment. Portugal also needs to continue increasing skill levels. Educational attainment continues to improve, but the share of low‑skilled workers is still high. Raising the quality of education and training in vocational schools would help align skills with business needs and achieve inclusive growth.

Economic growth is projected to edge down

GDP growth is projected to ease to 1.7% by 2021. Despite low inflation and supportive financial conditions, household spending growth is set to soften due to some moderation in employment growth and stabilisation of wage growth. Despite weak foreign demand, exports are set to keep growing due to competitiveness gains on the back of subdued unit labour cost growth. Investment growth will increase in 2021, supported by increased absorption of EU structural funds, and push up imports.

Downside risks stem from a further deterioration of growth prospects in the European Union. Continued uncertainty stemming from the Brexit may affect trade and tourism. The banking sector is still vulnerable to financial shocks due to high levels of non-performing loans. Upside risks stem from improved labour market performance and competitiveness of Portuguese exports as a result of ongoing structural reforms.