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Press release of Banco de Portugal on the December 2018 issue of the Economic Bulletin

Today, Banco de Portugal publishes the December 2018 issue of the Economic Bulletin, which updates macroeconomic projections for the period 2018-20 and releases, for the first time, projections for 2021.

Economic activity in Portugal is expected to continue to grow, but more slowly, over the 2018-21 horizon, in line with projections for the same period published by the European Central Bank (ECB) for the euro area as a whole. Gross domestic product (GDP) is projected to grow by 2.1% in 2018, 1.8% in 2019, 1.7% in 2020 and 1.6% in 2021. 

Figures projected for the 2018-19 horizon indicate slightly lower GDP growth in 2018 and 2019 than that estimated in the June and October issues of the Economic Bulletin, chiefly due to a downward revision of export growth, reflecting revised assumptions for external demand developments and the incorporation of the latest data. 

The external environment of the Portuguese economy is expected to remain relatively benign. After growing significantly more than activity in 2017 and 2018, international trade is expected to move more closely to world GDP, which implies relatively stable growth in external demand for Portuguese goods and services in 2019‐21. According to the projections, exports will grow by 3.6% in 2018, 3.7% in 2019, 4% in 2020 and 3.6% in 2021.

The slowdown in GDP over the 2018-21 horizon largely reflects a progressively lower contribution from exports net of import content. The contribution made by domestic demand net of import content to GDP growth is also projected to decrease slightly over the projection horizon.

Over the projection horizon, the Portuguese economy is expected to maintain a net lending position towards the rest of the world. The combined current and capital account balance is expected to stand, on average, at 1.3% of GDP in 2018‐20, relatively unchanged from 2017, and to rise to 1.6% at the end of the projection horizon. However, a shift in its composition is expected, given that a decrease in the goods and services balance is projected to be offset by developments in the primary income and capital accounts.

Following very dynamic growth in 2017, employment is expected to return to growth rates that are, on average, more in line with its historical relationship with activity over the projection horizon, which implies that the unemployment rate will continue to fall, although more slowly than in recent years. The unemployment rate is expected to stand at 5.3% at the end of the projection horizon.

Projections for inflation are relatively unchanged from previous Economic Bulletin issues. Consumer prices are expected to grow by 1.4% in 2018 and 2019, 1.5% in 2020 and 1.6% in 2021, reflecting some domestic inflationary pressures stemming from wage costs.

The external environment is the source of the main risk factors and uncertainty surrounding the current projections, contributing to downside risks to activity and slightly upside risks to inflation.

During the upturn that started in 2013, corporate gross fixed capital formation (GFCF) recovered more markedly than other investment components, while the share of exports in GDP increased, with a particular focus on the increased importance of tourism. According to the current projections, these trends are expected to persist and are consistent with a more sustainable growth profile for the Portuguese economy.

As a result, the openness of the Portuguese economy increased substantially, thus heightening its exposure to international developments, particularly in the euro area. Against this background, some of the main challenges facing the Portuguese economy over the coming years are also those of the euro area and the European Union. The Portuguese economy continues to face specific constraints to growth in the medium to long term. Despite the progress made over the past few years in the functioning of markets and the deleveraging in the various sectors of the economy, these factors should continue to impact on investment and productivity developments. The reallocation of resources to sectors more exposed to international competition, which are typically more open to innovation, should be further pursued, thereby enhancing composition effects that improve total factor productivity. Finally, population ageing constrains the contribution of labour input to growth, although developments in migration flows may counterbalance this negative trend. Against this background, investment in human capital remains key to promote long-term growth.

The December issue of the Economic Bulletin includes a Special Issue: “Tourism exports: recent developments and future prospects”, and two boxes:

  • Box 1 | Growth factors
  • Box 2 | Are foreign-owned companies better positioned to invest?