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Press Release of Banco de Portugal on the March 2020 issue of the Economic Bulletin

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


The outlook for the Portuguese economy has undergone a sudden and marked deterioration as a result of the impact of the COVID-19 pandemic. The pandemic corresponds to an adverse economic shock, with very substantial – and potentially long-lasting – effects on the well-being of citizens and business activity.  

The heightened uncertainty and complexity underlying this projection exercise mean that it is not possible to present a scenario deemed most likely for developments in the Portuguese economy. Against this background, Banco de Portugal has chosen to present two scenarios – a baseline scenario and an adverse scenario – with different assumptions on the economic effects of the pandemic in Portugal and worldwide. The projections seek to take into account the potential impact of the policies adopted by national and European authorities in response to this shock.

Both scenarios foresee a recession of the Portuguese economy in 2020. The shock is expected to peak in the second quarter of the year, with a gradual normalisation from the second half of the year onwards. The impact of the pandemic crisis is of a very persistent nature, associated with the destruction of installed productive capacity, and the return of GDP levels to the path projected in the December 2019 issue of the Economic Bulletin is not observed. The profile of economic activity in Portugal is in line with developments worldwide and, in particular, in the euro area. 

In both scenarios, projections for gross domestic product (GDP) growth in 2020 reflect substantial downward revisions from those presented in the December issue of the Economic Bulletin, which pointed to an increase in economic activity of 1.7% this year and 1.6% thereafter. 

Projections for the Portuguese economy for 2020-22 - baseline scenario

Baseline scenario

In the baseline scenario, real GDP is estimated to decrease by 3.7% in 2020. It is assumed that the economic impact of the pandemic is relatively limited, partly due to the assumption that the measures taken by economic authorities are effectively able to contain the damages to the economy. Portuguese economic growth is expected to still be weak in 2021 (0.7%), but recover more considerably in 2022 (3.1%). 

In the labour market, employment is projected to drop by 3.5%, while the unemployment rate is expected to increase to 10.1% in 2020. In the subsequent years, the unemployment rate is expected to decrease gradually, to 9.5% and 8.0% respectively in 2021 and 2022. Projected developments in unemployment crucially hinge on the configuration and magnitude of policy measures that may be immediately implemented.

Private consumption is projected to decrease by 2.8% in 2020, after a 2.3% increase in 2019.  Consumption developments reflect, on the one hand, rising household savings amid great uncertainty and, on the other hand, a slight reduction in real disposable income. This reduction is mitigated by the announced fiscal measures, with a significant increase in government transfers to households being foreseeable in 2020. Turning to government consumption, 2.1% growth is expected in 2020, up from that observed in 2019 (0.8%), as a result of a substantial hike in health expenditure borne by the general government. 

In the baseline scenario, gross fixed capital formation (GFCF) is expected to decrease by 10.8% in 2020, due to the marked reduction in corporate investment and, to a lesser extent, residential investment. Investment expenditure of firms should be strongly affected by the heightened uncertainty about the magnitude and duration of the outbreak and its impact on the outlook for domestic and foreign demand. 

Exports of goods and services are projected to drop markedly in 2020, by 12.1%, after a 3.7% increase in 2019. This reflects the reduction in external demand for Portuguese goods and services, associated with the weakening global economic activity resulting from the pandemic. Exports of services, particularly tourism and transport, are strongly affected by limitations to the movement of people and should fall markedly. Real imports are also expected to decrease considerably in 2020 (-11.9%, after a 5.2% increase in the previous year), reflecting the contraction in global demand. 

The current and capital account balances remain in surplus over the projection horizon: 2.0% this year, 2.4% in 2021 and 1.3% in 2022, benefiting from oil price decreases. Against the background of a shock on aggregate demand and supply, involving substantial changes in relative prices, it is assumed that a downward effect on prices prevails. As such, the inflation rate is likely to remain at low levels over the entire projection horizon: 0.2% in 2020, 0.7% in 2021 and 1.1% in the last year of the projection horizon. 

Projections for the Portuguese economy for 2020-22 - baseline scenario

Adverse scenario

In the adverse scenario, the economic impact of the pandemic is assumed to be more substantial due to the more prolonged halt in economic activity in several countries, resulting in greater capital destruction and job losses. This scenario also assumes greater uncertainty and more considerable turmoil in financial markets. Under these circumstances, the Portuguese economy is expected to experience a deeper recession, with GDP dropping by 5.7% in 2020. In the subsequent years, economic activity should recover, with foreseeable growth of 1.4% in 2021 and 3.4% in 2022. 

In this scenario, the unemployment rate is projected to rise more markedly in 2020, to 11.7%, and in spite of the reduction expected for the following years, it should remain at levels above those of the baseline scenario (10.7% and 8.3% respectively in 2021 and 2022). 

Private consumption is projected to decrease by 4.8% in 2020. Households are likely to cut consumer spending more substantially in a scenario  of heightened uncertainty, also characterised by greater job losses, higher unemployment rate levels and more unfavourable financing conditions. 

The adverse scenario incorporates a 14.9% fall in GFCF in 2020. The impact of the shock on corporate investment is enhanced by heightened uncertainty, the more marked slowdown in global demand and the deterioration in financing conditions. 

Against a background of a global recession and a collapse of world trade, external demand for Portuguese goods and services is projected to decrease more considerably and lead to a fall in exports of goods and services of approximately 19.1% in 2020. In the subsequent years, this aggregate is expected to recover in line with the external cycle. Imports should drop by 18.7% in 2020 and recover in 2021-22. 

The current and capital account balances maintain surpluses close to those projected in the previous scenario over the projection horizon (2.0%, 2.9% and 1.4% respectively in 2020, 2021 and 2022). The inflation rate is expected to remain at even lower levels over the entire period, and to stand at -0.1% this year, 0.5% in 2021 and 0.7% in 2022.

Uncertainty surrounding these scenarios is very high, given the recent developments in the pandemic, the containment measures adopted by most countries, the great financial market turmoil and the policy measures which have been successively reinforced across jurisdictions. Given the starting point and the uncertainty surrounding the crisis under way, even more adverse scenarios cannot be excluded. 

The Portuguese economy presents specific vulnerabilities to a shock of this nature. The importance of the tourism sector for economic activity entails a high exposure to the expected reduction in global demand for this type of service, which will be very substantial. An economic shock of such magnitude also results in increased difficulties for the corporate sector, which is chiefly composed of small-sized enterprises with a relatively fragile financial situation. Finally, the high percentage of households close to or below the poverty line in Portugal means that there is only a small margin to absorb the expected shock on income.

The crisis triggered by the novel coronavirus poses an unprecedented, serious challenge to the various economic policies, which should prioritise a short-term response to the impact brought on by the pandemic, but medium-term considerations should also be taken into account. 

The present time once again underlines the need to strengthen international leadership, coordination and cooperation in several domains, notably in economic terms. In this context, the deepening of the Monetary Union is especially important, with the implementation and reinforcement of European budgetary mechanisms for economic stabilisation and for the promotion of convergence. In the presence of a common shock, like the coronavirus outbreak, solidarity and the adoption of shared policies at European level is paramount. Furthermore, international cooperation aimed at preventing the build-up of macroeconomic imbalances and the adoption of protectionist policies should be intensified.

In Portugal, as in past crises, economic agents and the society in general will know how to overcome the current emergency situation in a spirit of solidarity, and lessons should be drawn to make it possible to do better in the future, in a European and international cooperation environment.


Special issue: “A look into external account developments in Portugal”

The Economic Bulletin includes a special issue, which looks into external account developments in Portugal. In addition to reviewing basic concepts of the analysis of balance of payments statistics, the special issue outlines recent developments in external accounts in Portugal from both a historical and international perspective.

The Economic Bulletin also includes a box on the main factors behind the deviation between actual figures and Banco de Portugal’s projections published in the March 2019 issue of the Economic Bulletin:

Box 1 - An assessment of projections for 2019