Portugal: Economic and Political Overview
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After achieving several years of sustained growth, economic output in Portugal fell sharply following the outbreak of the COVID-19 pandemic. Nevertheless, the country recovered quickly, growing by 6.2% of GDP in 2022. The year was characterized by a good start thanks to a strong rebound in the tourism sector and a positive balance in the export of services; although growth was hampered in the second half due to supply-chain disruptions, elevated energy prices and rising interest rates. The implementation of the European Recovery and Resilience Plan is expected to support the economy over the forecast horizon, but there are risks that implementation delays continue. For 2023, the IMF expects growth to be sluggish (0.7%): elevated energy bills will constrain private demand, whereas the weaker performance of Portugal’s main trading partners should contribute to a slowdown in trade. Only in 2024, when the global political and economic condition is expected to normalize, GDP growth will resume at a faster pace (2.4% - IMF).
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 first, and then by the energy prices shock that was exacerbated by the Russian invasion of Ukraine. The energy-related measures taken by the Portuguese government – including income support and reduced indirect taxes for both households and firms - were worth close to 2.1% of GDP in 2022, and contributed to a budget deficit of around 0.7% of GDP. On the other hand, public revenues benefited from strong economic growth and high prices. Despite the fact that the positive performance of government revenue is expected to continue over the forecast horizon, the IMF sees the budget deficit at 1% of GDP this year and in 2024. Driven by a favourable nominal growth-interest rate differential, the public debt-to-GDP ratio decreased to 114.7% in 2022 (from 127.4% one year earlier) and should follow a downward trend in 2023 (111.2%) and 2024 (106.7%). After stagnating for several years, inflation spiked to 7.9% last year, propelled by high energy prices, which triggered pass-through effects to other goods and services, and a severe drought that contributed to one of the highest hikes in unprocessed food prices among the eurozone. The IMF forecasts inflation to gradually ease to 4.7% this year and 2.6% in 2024 amid a tighter European monetary policy and the normalization of energy and food costs.
The unemployment rate decreased to 6.1% in 2022 (down from 6.6% one year earlier). Although wage growth strengthened, it was not enough to protect households’ purchasing power. According to the IMF, unemployment should increase marginally over the forecast period, up to around 6.5%. Overall, Portuguese GDP per capita (PPP) is estimated at USD 42,067 in 2022 (IMF), still 22% below the EU’s average. According to the latest figures from the national statistical office INE, 18.4% of the population is at-risk-of-poverty, corresponding to the proportion of inhabitants with an annual net equivalent monetary income below EUR 6,653.
| Main Indicators | 2020 | 2021 | 2022 (E) | 2023 (E) | 2024 (E) |
| GDP (billions USD) | 228.85 | 254.15 | 252.38 | 267.72 | 277.81 |
| GDP (Constant Prices, Annual % Change) | -8.3 | 5.5 | 6.7 | 1.0 | 1.7 |
| GDP per Capita (USD) | 22,225 | 24,694 | 24,522 | 26,013 | 26,993 |
| General Government Balance (in % of GDP) | -2.3 | -1.6 | -2.8 | -1.4 | -1.3 |
| General Government Gross Debt (in % of GDP) | 134.9 | 125.4 | 116.0 | 112.4 | 108.6 |
| Inflation Rate (%) | -0.1 | 0.9 | 8.1 | 5.7 | 3.1 |
| Unemployment Rate (% of the Labour Force) | 7.1 | 6.6 | 6.0 | 6.6 | 6.5 |
| Current Account (billions USD) | -2.38 | -1.94 | -3.39 | -2.06 | -2.03 |
| Current Account (in % of GDP) | -1.0 | -0.8 | -1.3 | -0.8 | -0.7 |
Source: IMF – World Economic Outlook Database, October 2021
The agricultural sector comprises around 2.2% of Portugal’s GDP and employs 6% of the active population (from 10% 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. Furthermore, the forests of Portugal provide a large part of the world's supply of cork. According to the first estimate of the Economic Accounts for Agriculture, the income of agricultural activity, in real terms, per annual work unit, registered a sharp decline in 2022 (-11.8%). Between January and October 2022, exports of agricultural products increased by 30.5% (National Statistics Institute), with imports increasing at a faster pace (+32.2%).
The industrial sector employs 25% of the workforce and contributes to 19.7% 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. Biotechnologies and IT are also growing. According to data from the World Bank, the manufacturing sector alone contributes 12% of GDP. Portugal has increased its role in the European automobile sector and has an excellent mould manufacturing industry. According to data by the National Statistics Institute, in 2021, the total sales of products and services in the manufacturing industries increased by 15%, in nominal terms, totalling EUR 96.8 billion, surpassing the pre-COVID level by 2.9%.
The services sector comprises 64.7% of GDP and employs around 70% of the active population. Tourism, in particular, plays an important and rapidly increasing role in the Portuguese economy. After suffering following the COVID-19 pandemic, the revenue of the accommodation sector in the first ten months of 2022 already surpassed that of 2019 (also due to the increase in prices of services provided). 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: 61 banks, 81 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) | 2.2 | 19.7 | 64.7 |
| Value Added (Annual % Change) | 5.8 | 5.6 | 4.6 |
Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.
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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.}}
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Source: Index of Economic Freedom, Heritage Foundation
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.
Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024
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Latest Update: September 2023
