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Potential output: How does Portugal compare with the euro area over the last 40 years?

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Model-based comparisons suggest that Portugal, vis-à-vis the euro area, witnessed (i) a steeper deceleration of potential output since the 1990s, driven primarily by investment and productivity, but with an important labour contribution over the last decade; (ii) a pervasively higher volatility in labour and product markets; and (iii) an interruption of convergence trends in the 2000s. The 2007–2009 financial turmoil and the euro area sovereign debt crisis comprised (iv) a trend and a slack component in both economies, including an abnormal fall in Portuguese potential output. Finally, (v) annual potential output growth differentials, relatively to the euro area, are systematically negative since 2003—an outcome that should motivate some reflection. All results are model and data dependent, which emphasizes the need to enlarge the current information set to account for a more encompassing and robust comparison.
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