The economic reality of Portugal deciphered

Cradle of great seafarers and founder of trade routes, Portugal has long been a powerful and colonial country. However, at 19as well as and 20as well as century it was one of the poorest in Western Europe. After the revolution of 1974, which also marked the end of the colonies, the last Portuguese overseas possessions in Africa were redirected towards Europe.

In 1986, Portugal joined the European Economic Community, which led to strong and sustainable economic growth. The economic crisis that hit the United States, then Europe in 2008, then heavily affected the country’s GDP. In 2011, the European Union and the IMF authorized a 78 billion euro rescue plan for Portugal, which was thereby able to maintain the continuity of its public services. This was followed by a slow recovery over the course of seven years, leading Portugal to achieve positive growth again in 2015. Until 2019, the country recorded above-average growth for OECD countries.

The evolution of Portugal’s GDP.

(Source: Portugal Economic Review, OECD 2021)

Growth of 4.9%: the economy is strong but fragile

In 2020, due to the pandemic, Portugal’s GDP fell by 8.4%. In 2021, it grew by 4.9% in volume, the strongest increase since 1990 and nearly reaching pre-pandemic levels. Government measures and EU assistance have been effective in preventing the country’s economic collapse, unlike in 2008, but resilience is not complete.

The situation in hard-hit sectors, including tourism and hospitality, is still well below pre-crisis levels. Due to the pandemic, the tourism sector has lost 65% of its annual income in 2020 and if the recovery figures are good, the country will remain highly dependent on air transport due to its remote position in Europe.

Nevertheless, direct and indirect support measures made it possible to limit job losses. The unemployment rate of 6.3% in the third quarter of 2021 is below the pre-crisis level (6.5% in 2019). Favorable monetary policy in the euro area and a wide range of measures, including government loan guarantees, subsidies, tax deferrals and a moratorium on loan repayments by companies and households hit by the pandemic, have prevented a sudden rise in bankruptcies and defaults.

853,200 guests in January 2022: recovery thanks to tourism

Portugal has been living for ten years at the expense of a traditional economy, mainly focused on the export of services (tourism, transport). In terms of merchandise exports, Portugal’s main client countries are Spain (26.7%), France (13.1%) and Germany (11%). In 2021, exports amounted to 63.477 million euros, mainly in the machinery and vehicles sector. In terms of services, Portugal exports to France (14.8%), Spain (14%) and the UK (13.8%), mainly in the travel, transport and business services sector. In 2021, the balance of services recorded a positive balance of 9,884.73 million euros, while the balance of goods and goods remained negative at -15 (340.91 million euros).

In January 2022, the tourist accommodation sector registered 853,200 guests and 2 million overnight stays. Compared to January 2022 compared to January 2020, the number of guests and overnight stays decreased by 39.9% and 38.8% respectively.

2000 Startup Incubators: A Diversification Strategy

The country is seeking to diversify its economy through the development of new sectors in which it wants to attract foreign investors, such as clean technologies and energy (hydrogen), health research and development centers (biopharmaceutical clusters) and fintech. The strategy is actively supported by economic development agencies abroad and embassies, including those of Portugal in Luxembourg, a historic host country with about 150,000 Portuguese residents or cross-border workers.

The cities where economic activity and innovation are concentrated are Porto, Lisbon and Braga. The creation of a new public investment bank (Banco Português de Fomento) from the merger of several institutions could act as a lever, offering financing solutions for projects related to research, SMEs, innovation and sustainable development.

Financing small and medium enterprises, which are generally poorly capitalized in Portugal, which is still critical to economic growth, will be a major challenge. The Portuguese government has invested heavily in the digitization of services in all areas. The country is now heavily digitized, especially in healthcare and government services. It has the strongest growth in Europe in terms of developing digital ecosystems, in particular startups, with 2,000 incubators and six unicorns (Farfetch, Feedzai, OutSystems, Remote, Sword Health and Talkdesk).

8% investment increase in 2022

The country’s stability program predicts stable growth at 4.9% in 2022. Investment growth is expected in 2022 (+8.0%) and 2023 (+8.6%). The economic prospects depend on two factors: firstly, on the development of the pandemic, in particular on the effectiveness of vaccines against variants of the virus. While vaccination rates are the highest in the OECD, the recovery is clouded by great uncertainty.

Secondly, the geopolitical situation, in particular the Russian-Ukrainian conflict, which is causing supply disruptions and rising energy prices, is fueling the ongoing weakness of Portuguese economic activity and could lead to further job cuts and bankruptcies of financially vulnerable companies. Although Portugal is not very dependent on Russian gas and 60% of the country’s electricity comes from renewable sources (solar and wind), the ripple effects of the financial sanctions imposed on Russia could dampen the recovery.

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