Portugal flag Portugal: Economic and Political Overview

The economic context of Portugal

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

After achieving several years of sustained growth, economic output in Portugal fell sharply following the outbreak of the COVID-19 pandemic. Nevertheless, the country’s economy rebounded by an estimated 4.4% in 2021, as the gradual relaxation of pandemic-related restrictions pushed up consumer demand and employment. While tourism (accounting for around 15% of GDP) remained significantly below pre-pandemic levels with regards to international arrivals, domestic tourism performed particularly well, reaching historical highs in the summer. The implementation of the European Recovery and Resilience Plan is expected to support the economy over the forecast horizon, with the IMF forecasting a growth of 5.1% of GDP this year, followed by 2.5% in 2023. Growth will also be backed by an improvement in the current-account balance, although risks remain related to the evolution of the pandemic and to global supply constraints that could hinder industrial activity.

The Portuguese government had managed to gradually reduce its budget deficit in recent years, reaching positive territory. This trend was reversed by the impact of COVID-19, as the budget deficit stood at 1.6% of GDP in 2021, when continued growth in government expenditure in response to the crisis, higher spending on subsidies and social benefits, and the expansion of the public wage bill were only partially offset by an increase in government revenues and the intake of EU funds. Underpinned by the economic recovery, the deficit should float around 1.3% of GDP over the forecast horizon. After its peak at 135.2% in 2020, the general government debt-to-GDP ratio started a downward trajectory in 2021 (130.8%), driven by a favourable growth interest rate differential and a rebound in GDP. It is projected to moderate further to 125.7% in 2022, and to 122.8% in 2023. After stagnating for several years, inflation picked up to 1.2% in 2021 amid rising global energy prices. The IMF expects the rate to further accelerate to 1.3% this year and 1.4% in 2023.

The impact of the sanitary crisis on unemployment was partly offset by temporary forms of support granted by the government, which benefited around 750,000 employees or nearly 15% of the labour force. Hence, the unemployment rate increased only moderately, reaching an estimated 6.9% in 2021 from a pre-pandemic level of 6.6%. The rate is forecast to decline only marginally due to higher labour force participation rates and a gradual recovery in labour productivity, at 6.7% in 2022 and 6.3% the following year (IMF). Overall, Portuguese GDP per capita (PPP) is estimated at USD 36,079 in 2021 (IMF), still 23% below the EU’s average.

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 240.01228.36251.71271.19286.90
GDP (Constant Prices, Annual % Change) 2.7-8.44.45.12.5
GDP per Capita (USD) 23,33322,14924,45726,40427,998
General Government Balance (in % of GDP) -0.1-0.9-1.6-1.3-1.3
General Government Gross Debt (in % of GDP) 116.6135.2e130.8125.7122.8
Inflation Rate (%) 0.3-0.11.21.31.4
Unemployment Rate (% of the Labour Force) 6.67.06.96.76.3
Current Account (billions USD) 1.04-2.54-4.23-5.77-4.23
Current Account (in % of GDP) 0.4-1.1-1.7-2.1-1.5

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

Main Sectors of Industry

The agricultural sector comprises around 2.1% of Portugal’s GDP and employs 5.5% of the active population (from 10.8% a decade ago - World Bank, latest data available). The main crops produced include cereals, fruits, vegetables and wine (Portugal is the ninth-largest wine exporter in the world). Mining, specifically copper and tin, represents a good part of the country’s GDP, with Portugal being one of the largest marble exporters. The forests of Portugal provide a large part of the world's supply of cork. According to the latest estimate from the National Statistics Institute, in 2021 the income from agricultural activity per annual work unit grew 11.1%, as a result of the expected increases for gross value added (+9%) and for other subsidies on production (+9.7%), after a stagnation in 2020 (-0.1%).

The industrial sector employs 24.7% of the workforce and contributes to 19.4% of Portugal’s GDP. The manufacturing industry is modern and dominated by small and medium-sized companies. Its main sectors of activity are metallurgy, machinery, electrical and electronics industries, mechanical engineering, textiles and construction. According to data by the World Bank, the manufacturing sector alone contributes 11.9% of GDP. Portugal has increased its role in the European automobile sector and has an excellent mould manufacturing industry. Biotechnologies and IT are also growing.

The services sector comprises 65.7% of GDP and employs nearly 69.8% of the active population. Tourism, in particular, plays an important and rapidly increasing role in the Portuguese economy. Before the pandemic, it accounted for nearly 15% of GDP. However, the last couple of years have seen numbers decreasing following the global Covid-19 crisis: the latest data from the National Statistics Institute shows that overnight stays recorded in the first eleven months of 2021 increased by 40.4% compared to 2020 (+36.0% for residents and +45.3% for non-residents); however, when compared to the same period in 2019, overnight stays decreased by 47.7% (-10.8% for residents and -63.3% for non-residents). The Portuguese banking sector improved its liquidity and solvency in recent years, playing a critical role in supporting the economy’s financing and liquidity needs. It comprises 145 institutions: 60 banks, 82 mutual agricultural credit banks and 3 savings banks, with the five largest banks accounting for 77% of total assets (European Banking Federation).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 5.5 24.7 69.8
Value Added (in % of GDP) 2.0 19.2 66.1
Value Added (Annual % Change) -9.0 -5.5 -6.6

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
67,5/100
World Rank:
52
Regional Rank:
29

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
6.72/10
World Rank:
35/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Latest Update: May 2022

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