Today, Banco de Portugal publishes the October 2019 issue of the Economic Bulletin (In Portuguese only). The Bulletin assesses Portuguese economic developments in the first half of 2019, updates the macroeconomic projections for the year as a whole and presents an in-depth analysis of real convergence in the European Union (EU) and of the relative performance of the Portuguese economy.
Economic activity in Portugal should continue to grow in 2019, albeit at a slower pace than in the recent past. After growing by 2.4% in 2018, gross domestic product (GDP) is expected to increase by 2% in 2019. Projected growth for Portugal is 0.9 percentage points (p.p.) higher than estimated by the European Central Bank for the euro area. This positive growth differential, observed since 2016, should be seen in a longer-term perspective. Indeed, in the past 25 years, Portuguese GDP per capita has not come closer to the average levels in the EU.
Banco de Portugal projections for economic activity and the current and capital account are not directly comparable with those published in the June issue of the Economic Bulletin due to a recent revision to the national accounts and balance of payments series.
Against a backdrop of a slowdown in global activity and, more markedly, in world trade, exports of goods and services are estimated to grow by 2.3% in 2019, after increasing by 3.8% in 2018. Portuguese exporters should continue to record external market share gains, particularly in the tourism and car production sectors.
Imports are expected to grow by 4.6% in 2019 (1.2 p.p. less than in the previous year), in the context of a slight slowdown in economic activity.
Gross fixed capital formation (GFCF) is projected to increase by 7.2% in 2019, after growing by 5.8% in the previous year. The higher pace of growth reflects the behaviour of construction, influenced by the execution of a number of large infrastructure projects, in some cases associated with public investment and European funding.
Private consumption is projected to grow by 2.3% in 2019, a more moderate expansion than in the previous year (3.1%) and also closer to GDP growth, reflecting developments in current consumption and spending on durable goods.
In the year as a whole, the Portuguese economy’s net lending, as measured by the current and capital account balance, is expected to stand at 0.5% of GDP, i.e. below the level observed in the previous year (1.4% of GDP). These developments reflect a deterioration in the goods and services account.
Projections suggest that labour market conditions will continue to improve in 2019, albeit at a slower pace. Employment is expected to rise by 0.9% (1.4 p.p. less than in the previous year). The unemployment rate, which stood at 7% in 2018, is expected to continue to decline, reaching 6.4% in 2019. Wages are projected to accelerate against the backdrop of diminishing available resources in the labour market.
Inflation, as measured by the rate of change in the Harmonised Index of Consumer Prices (HICP), is expected to stand at 0.4% in 2019, compared with 1.2% the year before.
In the first half of 2019, the Portuguese economy decelerated slightly, although continuing to grow at a higher pace than the euro area. GDP increased by 2% year on year (0.2 p.p. less than in the second half of the previous year), showing some resilience compared with the euro area as a whole, where economic activity slowed down more sharply in recent quarters.
Exports increased by 2.3% until the end of June, accelerating slightly compared with the second half of 2018, but showing lower growth than in previous years. The loss of momentum in exports occurs in the context of a slowdown in world trade and external demand for Portuguese goods and services. In turn, imports grew above exports, increasing by 5.8%.
GFCF grew far above GDP, posting a year-on-year rate of change of 9.5% (5.5% in the previous half-year). Strong growth was seen across the main components, but most notably in construction. The buoyancy in investment in construction was related to a significant increase in loans to the sector.
Private consumption grew by 2.3% in the first half of 2019, compared to 3.2% in the previous half-year. This slowdown occurred in the context of declining consumer confidence and continued robust growth in real disposable income, reflecting gains in employment, greater wage growth and a lower rate of inflation. The savings rate decreased slightly over the period.
Employment grew by 1.2% in the first half of 2019, compared to 1.9% in the previous half-year. The unemployment rate remained on a downward path, standing at 6.5% at the end of June, the lowest level since the first half of 2004. Labour supply constraints and the dynamics of demand have contributed to increased pressure on wages.
Consumer prices decelerated in the first half of the year, with inflation reaching 0.7% (1.3% in the second half of 2018).
Overall, the current growth environment of the Portuguese economy should be evaluated within the context of a deteriorating international environment and high uncertainty. The current juncture should therefore be considered a window of opportunity to strengthen policies and structural reforms which contribute to the correction of the Portuguese economy’s main vulnerabilities. Progress in terms of human capital, capital per worker and the institutional environment is essential to resume a lasting and substantial convergence of Portuguese income levels towards the European average, but also to ensure the resilience and decrease the exposure and vulnerability of the economy to external risks.
The October Economic Bulletin includes a Special Issue: “Real convergence in the European Union and the relative performance of the Portuguese economy”.
It also includes six boxes: