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Press Release of Banco de Portugal on the October 2018 issue of the Economic Bulletin

Today Banco de Portugal publishes the October 2018 issue of the Economic Bulletin. The Bulletin analyses Portuguese economic developments in the first half of 2018 and updates macroeconomic projections for the current year.

 

Updated projections for 2018

In 2018, economic activity in Portugal should continue to expand, albeit at a slower pace in comparison to that observed in the previous year.

Gross domestic product (GDP) increased by 2.3% in the first half of 2018 and is expected to grow by 2.2% in the second half of the year. For 2018 as a whole, GDP growth is expected to be 2.3%, 0.5 percentage points (p.p.) lower than that registered in 2017, but 0.3 p.p. higher than the growth estimated by the European Central Bank for the euro area, thus continuing the very gradual process of real convergence of the Portuguese economy with the euro area.

Banco de Portugal’s projections of expanding economic activity coincide with those published in the Economic Bulletin in June, with alterations in the components’ developments: the growth of exports and the growth of gross fixed capital formation have been adjusted downwards; offsetting this, private consumption should increase more quickly than was expected in June.

In a context of decelerating external demand for Portuguese goods and services, exports of goods and services are expected to grow 5.0% in 2018 (0.5 p.p. less than projected in June), after having grown 7.8% in 2017. New market share gains are expected for Portuguese exporters, albeit lower than those observed in 2017 and chiefly in the tourism and automotive sectors.

Gross fixed capital formation should grow 3.9% (1.9 p.p. below the rate forecasted in June), representing a year-on-year deceleration of 5.3 p.p.. The deceleration is expected to extend to the different components.

Having increased by 2.3% in 2017, private consumption is expected to grow 2.4% in 2018 (0.2 p.p. more than forecast in June), reflecting strong growth in real disposable income associated with buoyant job creation and the recovery of real wages. The household saving rate is expected to remain at historically low levels.

Over the year as a whole, the Portuguese economy is projected to present a net lending position, measured by the current and capital account surplus, equivalent to 1.4% of GDP, which is identical to that of the previous year, but 0.4 p.p. below that estimated in the June Economic Bulletin.

Projections point to a further improvement in labour market conditions in 2018. Employment is expected to increase by 2.3% over the year as a whole, 1.0 p.p. lower than in the previous year. The unemployment rate, which was 8.9% in 2017, should continue to fall, reaching 7.0% in 2018. Wages are expected to accelerate, reflecting pressures from the reduction in the unemployment rate, the increase in the national minimum wage and the gradual unfreezing of career progressions in the general government.

The inflation rate, as measured by the rate of change in the harmonised index of consumer prices (HICP), is projected to fall 0.2 p.p. in 2018, reaching 1.4%, as projected in June.

The Portuguese economy in the first half of 2018

In the first half of 2018, the Portuguese economy continued to expand, albeit more moderately than in 2017, essentially reflecting a slowdown in activity in manufacturing and construction. GDP grew 2.3% year-on-year, 0.2 p.p. less than in the second half of 2017, but in line with developments in euro area activity. In the second quarter of 2018, real GDP surpassed the level registered prior to the international economic and financial crisis, a result observed in terms of real GDP per capita since mid-2017.

Exports of goods and services grew 6.0% in the first half of the year, 0.7 p.p. less than in the preceding half, tracking developments in external demand for Portuguese goods and services. This lower growth reflected a deceleration in exports of services. In terms of goods exports, there was a slight acceleration, the result of very significant growth in exports of passenger cars – reflecting the increase in export capacity of an important manufacturing unit in the sector – which compensated a deceleration of other goods. Tourism exports maintained a strong growth rate of 12.0% in the first half of 2018, following an increase of 14.7% in the second half of 2017. As with exports, imports also decelerated, to a growth rate of 6.4% in the first half of 2018, 1.5 p.p. lower than in the previous six months.

Gross fixed capital formation rose 4.0%, slowing 3.7 p.p. in relation to the second half of 2017. The construction component contributed the most to the deceleration of total gross fixed capital formation, registering an increase of 2.7% in the first six months of 2018, following growth of 7.3% in the second half of 2017. The machinery and equipment component continued to show robust growth, increasing 8.2% in the first half of the year (12.3% in the second half of 2017).

Private consumption grew 2.5% in the first half of 2018, 0.1 p.p. higher than in the preceding half-year, reflecting growth in households’ real disposable income and historically high consumer confidence. Current consumption accelerated slightly; the growth of durable goods consumption, albeit high, was lower than in the previous half-year, especially the automotive component.

In the year to the end of the first half of 2018, the Portuguese economy continued to present a net lending position, according to the information in the quarterly sector accounts, equivalent to 0.7% of GDP.

In the labour market, employment increased 2.8% in the first six months of 2018, having grown 3.3% in the preceding half. The unemployment rate fell from 8.3% in the second half of 2017 to 7.3% in the first half of 2018. Base wages per employee as declared to Social Security grew by 2.2% (1.7% in 2017 as a whole).

Consumer prices decelerated in the first half of the year, with the inflation rate reaching 1.1% in the first semester (1.5% in the second half of 2017).

After five years in which the economic expansion has generally exceeded the average of estimates of potential growth, a gradual moderation in the Portuguese GDP growth rate is expected in the next few years, consistent with a move towards the potential growth rate. The gradual maturation of the economic cycle makes it crucial to pave the way for an increase in the Portuguese economy’s structural potential growth, particularly considering the risks associated with high indebtedness levels and the challenges posed by demographic developments, the low levels of capital per worker and skilled labour and the weaknesses in the functioning of the market, which have led to the misallocation of resources in the past.

The increase in the Portuguese economy’s structural potential growth depends on the implementation of measures that encourage a sustained increase in investment, an improvement in the use and quality of inputs and the efficient functioning of markets. There is also a need to adopt measures to mitigate the macroeconomic impact of a shrinking and ageing population. Finally, an essential condition for sustained economic growth is a stable macroeconomic framework, which in turn depends on decisive advances in the deepening of the economic and monetary union.

Special Issue: “Reallocation of resources and total factor productivity in Portugal”

The Economic Bulletin includes a Special Issue: “Reallocation of resources and total factor productivity in Portugal”.

In addition to the Special Issue, the Bulletin contains the following boxes:

  • Box 1 | Wages in the euro area: developments since 2013 and perspectives;
  • Box 2 | Euro area monetary policy: recent decisions and future prospects;
  • Box 3 | Bank lending survey: factors determining the level of the bank’s lending margins;
  • Box 4 | Bank lending survey: impact of banks’ NPL ratios on their lending policies and respective transmission mechanisms;
  • Box 5 | Recent developments in the sale of family dwellings and loans to households for house purchase: regional heterogeneity;
  • Box 6 | Evolution of firms’ leverage in Portugal, Spain and Italy;
  • Box 7 | Demographics in Portugal: recent developments and projections;
  • Box 8 | Indicators of cyclical developments for the Portuguese economy.