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.
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.
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 phase-out 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 reach-out 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.