OECD Economic Outlook, Volume 2020 Issue 1

Portugal

The economy is projected to shrink by 11.3% in 2020, should a second pandemic outbreak hit at the end of 2020 (the double-hit scenario). Assuming a single wave of the pandemic (the single-hit scenario), GDP is expected to decline by 9.4% in 2020, with a rebound of 6.3% in 2021. In the double-hit scenario, the recovery will be slower due to prolonged export weaknesses, heightened uncertainty, additional bankruptcies, and prolonged unemployment spells. By the end of 2021, public debt (Maastricht definition) is expected to increase to 131% of GDP if the virus outbreak subsides by this summer and 138% of GDP if there is a second wave later this year.

The government has implemented a number of measures to support firms and households and announced further measures to revamp the economy after the general confinement. The short‑term work scheme is containing the rise in unemployment. Tax and social security contribution deferrals alongside credit guarantees provide financial support to companies. The central bank provides ample liquidity along with eased macro‑prudential rules. If the crisis wears on, additional measures need to be considered. Debt reduction policies can help firms remain viable in the long term. Further revamping out‑of‑court insolvency processes could speed up debt resolution in case of substantial loan foreclosures.

Swift policy actions helped to contain the COVID-19 pandemic

The first official case was reported on 2 March. Following a rapid rise in the number of cases, the state of emergency was declared on 18 March. The North and Lisbon regions have been the most affected regions. Emergency measures to scale up acute care capacity allowed hospitals to cope with patients. In addition, public procurement and hiring rules were eased, the purchase of relevant medical goods was centralised and public campaigns were introduced, among others, to tackle mental health and domestic violence.

Portugal: Two scenarios of real GDP and two scenarios of unemployment

Source: OECD Economic Outlook 107 database.

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Portugal: Demand, output and prices (double-hit scenario)

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In order to contain the spread of the virus, Portugal adopted precautionary measures early on. Restrictions on movement within the country and across borders were introduced in coordination with EU partners. Additionally, public and cultural events were suspended. Moreover, face-to-face education was suspended and online classes introduced, non-essential shops closed and a general duty of confinement of the population was put in place on 19 March when the country had just around 400 confirmed cases. Since 4 May, confinement measures are being progressively eased after a careful assessment of the epidemiological situation.

The impact on economic activity and employment is high

Consumer and industrial confidence indicators fell significantly in March and hit record lows in April. The pandemic affects most economic activities, albeit with large differences across sectors. According to a recent enterprise survey, the construction sector only registered a mild reduction of economic activity, while smaller companies and those operating in the hospitality sector were affected the most. Despite the availability of credit guarantees, the share of companies facing liquidity shortages is high. In March, tourism activity dropped by 58.5% compared to a year earlier, the largest drop since 2013. The number of firms using the short‑term work scheme has increased significantly, as has the number of unemployed. Equity prices have dropped sharply while sovereign spreads have increased.

Portugal: Demand, output and prices (single-hit scenario)

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Policy support to the economy is extensive

The government has introduced a wide range of measures to shore up the economy, including a post‑-COVID fiscal package. As a first response to the pandemic, discretionary fiscal spending, public guarantees for loans and the deferral of tax payments (amounting to 0.9%, 3.3% and 3.7% of GDP respectively) were introduced. In order to protect the most vulnerable, short-term work schemes, temporary reductions in employer social contributions, and support schemes for the self-employed were implemented. The supervisory authority lowered the countercyclical capital buffer and suspended the mortgage amortisation requirement in the macroprudential recommendation on new credit agreements for consumers. Other firm‑specific measures include a special training programme to increase access to skills. This should contribute to the economic recovery in the medium‑term. In addition, interest free loans are available to meet rent payment obligations. Notable policy measures to boost demand and investment after the confinement include the creation of a development bank, the extension of the income support measures for households and of moratorium and credit lines to companies, and further increasing the capacity of the National Health Services.

The recovery will be slow

The confinement period of about two months implies a reduction of economic activity of 20% on average in the second quarter of 2020 compared to a normal period. Lockdown measures started to ease in May, but the recovery will be affected by lower real disposable income, higher precautionary saving and much lower tourism exports. Weakness in demand will pull down inflation, investment, and employment. In the scenario with a second outbreak of the pandemic, a further, albeit more limited, tightening of containment measures in the fourth quarter this year, GDP is projected to fall by 11.3% in 2020, with more severe consequences due to higher bankruptcies, longer unemployment spells and heightened uncertainty, further delaying investment decisions. In the absence of a second virus outbreak, GDP will fall by 9.4% in 2020, recovering only partially from the adverse economic impact of lockdown measures in 2021.

Downside risks have intensified. Public debt was declining but still high before the pandemic (118% of GDP in 2019). Additional spending will turn the fiscal surplus into a sizeable deficit. Combined with the deep economic contraction, this could increase public debt in 2021 to 131% of GDP (Maastricht definition) in the single-hit scenario and up to 138% of GDP in the double‑hit scenario. Private sector financial stability risks could increase again. A slow recovery could trigger a large wave of foreclosures in the most affected sectors with spillover effects to the financial sector via a significant rise in the non‑performing loans ratio which remains one of the highest in the OECD.

Additional policy action can help to support the economy

The government has implemented a number of measures to support the economy and announced a further stimulus package to facilitate a swift recovery. However, additional fiscal stimulus may be required. In event of a second pandemic outbreak, increasing the net replacement rate of the temporary employment scheme could further support household income and replace other income support schemes (i.e. rent repayment schemes). In order to avoid substantial loan foreclosures, it is crucial to complement public loan guarantees with other policy actions to ensure firms’ long‑term economic viability: for example, part of the tax deferrals may need to be converted into tax cuts to help firms facing bankruptcy risks. Debt reduction policies could also be envisaged (i.e. by converting loans into grants), which will not only avoid foreclosure waves, but also avoid debt overhang problems that might hamper investment. Revamping out‑of‑court insolvency processes could speed up debt resolution in case of substantial loan foreclosure. In order to reduce air pollution and related health risks, the use public transport and the development of new shared-transport solutions should be encouraged.