Special Briefing: What’s Behind Portugal’s Economic Revival?

What’s behind Portugal’s revival? Fiscal payoffs or Europe’s expansion?

Overview of Portugal’s Economy

Portugal’s economy recorded robust GDP growth of 2.7% in 2017, outperforming both the euro area (2.3%) and the EU28 (2.4%). Despite some hints of a deceleration, we expect the Portuguese economy to remain solid, with growth projected at 2.1% and 1.8% in 2018 and 2019 respectively – still better than the euro area. Meanwhile, we expect inflation to rise by 1.4% in 2018 and 1.5% in 2019, reflecting both upward pressure (wage growth) and downward pressure (lower energy prices). We upgraded Portugal’s country risk rating twice in 2018 in line with macroeconomic developments: from DB4b to DB4a in March, and then to DB3d in October, the latter shift promoting Portugal into our ‘slight risk’ category.

Drivers of Economic Growth for Portugal

The stark difference in Portugal’s economic performance since the global financial crisis compared with fellow strugglers like Italy, Greece and Spain has prompted further interest in how Portugal has managed to revive itself.

Developments in 2015 were particularly crucial for Portugal. The governing centre-right coalition that had implemented austerity measures was defeated in legislative elections, ousted by the centre-left Socialist Party (in a new alliance with the far-left). In the same year, having reversed the IMF/EU’s demanding austerity measures, Portugal managed to revive the economy, powered by thriving tourism, strong exports, and uplifts in both consumption and investment. In addition, the Portuguese labour market gained from this upturn, and in 2017 the unemployment rate had reverted to pre-crisis levels.

While the reversal of austerity has improved the business and consumer environment, the extent to which these payoffs are due to the government’s fiscal expansion or to Europe’s broader recovery remains a key question.

Signals from Portugal’s Economy

Although Portugal has delivered promising economic results in the past few years, and while it could continue to do so, economic risks have risen, both at the national level and across Europe more widely.

At the national level, Portugal’s economy still faces productivity issues and an extremely high national debt (126% of GDP), making it very vulnerable to interest rate rises. In addition, ongoing banking sector fragilities and a relatively weak bargaining position with the EU add to external risks, which have themselves risen amid the US-China trade conflict. So although the economy has looked promising of late, the foundations for long-term growth remain a key concern.

Moreover, Portugal’s B2B payments performance remains poor: average payment delays, in days, are around double the European average. Dun & Bradstreet’s proprietary data shows that the average payment delay in Portugal was 26.3 days in Q3 2018, compared with the European average of 13.3 days.

The wider European economy’s downside risks pose the bigger threat. These risks include: the ECB ending its QE programme, followed by potential rate hikes; ongoing Brexit uncertainties; and the expectation of a general slowing of growth. This harsher European backdrop could clarify the extent to which Portugal has successfully managed to resolve its structural weaknesses since boosting national spending in 2015.