Today the Banco de Portugal publishes the June 2020 issue of the Economic Bulletin. The Bulletin updates projections for the Portuguese economy for the period 2020-22.

Projections for the Portuguese economy in 2020-22

The projections presented in this Economic Bulletin are strongly affected by the extremely adverse economic effects of the COVID-19 pandemic. The Portuguese economy is expected to contract sharply in 2020 against a background of falls in global GDP and international trade comparable only to those registered in the Great Depression of 1929-32. Projections point to a decrease in gross domestic product (GDP) of 9.5% in 2020, reflecting the very negative impact of the pandemic during the first half of the year. 

Against a background of relative control of the epidemic and progressive lifting of containment measures adopted to tackle it, the expectation is that economic activity will begin to pick up from the third quarter of 2020 onwards. GDP is projected to grow by 5.2% in 2021 and 3.8% in 2022. At the end of the projection horizon economic activity is expected to be at a level close to that observed in 2019, albeit considerably lower than that expected before the pandemic.

Private consumption is projected to fall by 8.9% in 2020, more sharply than real disposable income, and should be followed by growth of 7.7% in 2021 and 3.0% in 2022. The savings rate should increase substantially in 2020, reflecting the difficulty in consumption of certain goods and services during the state of emergency and the high prevailing uncertainty. 

Public consumption is estimated to increase by 0.6% in real terms in 2020, as a combined result of greater expenditure on public health in the context of the pandemic crisis, and the fall in general government activity, related with a reduction in the number of hours worked. Following the reversal of these one-off effects and in the absence of additional policy measures, public consumption developments over the projection horizon are expected to be in line with those forecast for this year.

Investment should recover more rapidly than in previous cycles, following a significant drop in 2020, although it is expected that in 2022 it will still be lower than the levels recorded in 2019. Gross fixed capital formation (GFCF) is likely to decline by 11.1% in 2020, reflecting a sharp drop in the business component, and grow by 5.0% in 2021 and 4.5% in 2022. The expectation is that the negative impact on residential GFCF is relatively limited and that public GFCF grows more than GDP over the entire projection horizon.

Exports of goods and services are expected to fall by 25.3% in 2020, followed by growth of 11.5% in 2021 and 11.2% in 2022, which will be insufficient to return to the level registered in 2019. The fall in exports reflects, above all, a collapse in tourism-related services exports, with persisting effects until the end of the projection horizon. Imports of goods and services are projected to follow a trend relatively similar to that of exports. 

The economy’s net lending capacity, as measured by the combined current and capital account balance, should fall to 0.3% of GDP in 2020 and remain thus in the subsequent two years. In 2020 the goods and services account balance is projected to show a deficit for the first time since 2011, reflecting a reduction in the services account surplus, associated especially to the fall in tourism exports.

In the labour market, projections point to an expressive fall in employment in 2020 of 4.5%, and a significant increase in the unemployment rate to 10.1%. These developments depend critically on the policies adopted to preserve employment and enterprises’ liquidity. There should be improvements in employment and the unemployment rate in 2021 and 2022, but not enough to return to the levels observed in 2019.

As far as prices are concerned, a virtual stabilisation is projected for 2020 as a result of the fall in energy prices and contained growth in other goods and services. In the subsequent two years HICP inflation is expected to remain low, increasing to 0.8% in 2021 and 1.1% in 2022.

GDP developments in 2020 have been revised downwards in comparison with those projected in the adverse scenario included in the March issue of the Economic Bulletin. For the following two years, more robust growth is forecast than that considered in the aforementioned Bulletin. 

However, current projections continue to be conditioned by high uncertainty surrounding the development of the pandemic, the duration and impact of containment measures and the effect of policy measures adopted. The Economic Bulletin identifies downside risks to the projections for economic activity in Portugal, especially relating to the possibility of more adverse developments in the pandemic. Therefore, the Bulletin includes a more severe alternative scenario for the Portuguese and world economies, in which a new wave of infection is presumed with the consequent reintroduction of stringent containment measures, bringing about severe and persistent effects on activity and the labour market. 

Against a background of globalisation and strong integration across economies, the response to the pandemic crisis requires supranational coordination of economic policies and presumes a reconfiguration of production chains by enterprises whilst avoiding the adoption of protectionist measures that reduce welfare gains inherent to international trade in goods and services. In terms of the European economic context, it is important to limit the potential negative impact on real convergence associated with a recovery that is expected to be asymmetric, reflecting countries’ production structures and pre-existing structural imbalances. In addition to the investment efforts announced that remain bound by sustainability concerns, the recovery process from the crisis is expected to result in a reinforcement of institutional mechanisms indispensable to the deepening of the Economic and Monetary Union. The Portuguese economy is an integral part of this European and international context, although the need remains to adjust policy options to the specificities of the manufacturing base and collective choices made.

Special issue and boxes

The June issue of the Economic Bulletin includes a Special issue, entitled: “The ECB’s monetary policy strategy: reasons for a review.”

It also includes four boxes:

• Box 1 | Developments in economic activity in Portugal since early March;
• Box 2 | Impact of the pandemic on Portuguese enterprises – analysis based on the results of the COVID-IREE 
• Box 3 | A general equilibrium view on GDP projections;
• Box 4 | A more severe scenario for the Portuguese economy.