Portugal Economic Activity: Tourism reliance hampers recovery
Portugal has frequently been held up as an example of good management of the Covid-19 crisis. Indeed, the government moved rapidly to contain the virus and to avoid overwhelming the health system.
Portuguese government has also introduced a wide range of measures to cushion the impact of containment on households and firms and to reinvigorate the economy after the general confinement.
Two months of containment measures has left its mark on the Portuguese economy. Real GDP (flash estimate) contracted by 14.1% q-o-q in Q2, having fallen 3.8% in Q1. Taken together, the cumulative decline in output in H1 2020 was 17.3%, pushing GDP back to levels not seen since 1998 (see Chart 1).
The coronavirus is set to leave long-lasting scars on the country’s economy, whose structural features, particularly the importance of tourism, mean the recovery will be slow. We expect Portugal’s economy to contract by 9.7% in 2020 before rebounding by 5.8% in 2021. We foresee the economy returning to its pre-crisis level at the end of 2022. Risks remains tilted to the downside. Continued success in containing the virus will be key to determining the shape and the speed of the recovery.
Before the pandemic, public finances were gradually improving in Portugal. Recession and additional spending will push public debt to 135% of GDP in 2020 and 132% of GDP in 2021. Nevertheless, a big part of the increase in public debt is being absorbed by the ECB via its asset purchase programmes. This makes the debt burden much more sustainable.