Economy – What are the consequences of the war in Ukraine for Portugal?

On February 24, 2022, Russia launched an operation to invade Ukraine. An operation that shakes Europe and that has and will have consequences for the Old Continent. Lepetitjournal was interested in the economic consequences of the war with Portugal.

Portugal indirectly affected by the war in Ukraine

The war in Ukraine affects various sectors of the economy of European countries. However, in Portugal, according to financial supervisors, this impact is “limited”. The reason is that Portugal has few direct ties with Russia and Ukraine. Indeed, Banco do Portugal (BoP) reports that between 2015 and 2019, only 0.4% of Portuguese goods exports were destined for Russia and Ukraine. As for the import of goods, 2% for the same period fell on Russia and Ukraine.

In particular, the conflict does not greatly affect Portugal in terms of trade in goods, although recently, for example, wine producers exporting to Russia have expressed concern about the continuation of this situation. As the world is increasingly interconnected with the globalization of trade and European construction, these are rebound effects that nevertheless risk affecting Portugal. The main economic partners of the country are located in Europe, it is logical that the country will suffer in any case.

Energy and food sectors weakened by Russian invasion

Where conflict creates a direct problem in the country is in the energy and food sectors. Russia is the largest supplier of gas to Europe, and its oil production is also very high. In Portugal, 12% of energy imports came from Russia between 2015 and 2019. Ukraine, for its part, is the largest producer of cereals in Europe, especially corn. Almost 17% of Portuguese grain imports during the study period came from Ukraine.

Thus, price increases are to be expected. The balance of payments predicts inflation at 4% by 2022. The price of a barrel of oil is likely to rise to $103.6 (93.26 euros) within a year and then fall in subsequent years. Thus, energy is one of the first sectors affected by the Russian-Ukrainian conflict.

Disruptions in the Portuguese industrial sector

João Amador, Deputy Director of the BdP, points out the difficulty in obtaining goods and arranging transport from companies. Therefore, it will affect production. However, this impact must be qualified as the adaptability of national companies has been demonstrated during the Covid-19 pandemic.

The weakening of the energy and food sectors also has consequences for the production system. The difficulty of supplying companies, in particular with the increase in associated costs, leads to an increase in consumer prices. Thus, the purchasing power of the Portuguese is falling, according to Joao Amador.

Financial Market Uncertainty

There is also a vicious economic circle. In connection with the economic sanctions imposed by the European Union against Russia, which Portugal has joined, households and businesses are logically reducing the consumption of goods and services from Russia. As uncertainty reigns in the market, household consumption forecasts are lowering. This leads to a delay in business investment, which paralyzes the economy. Therefore, progress and growth slow down. In this sense, economic growth forecasts have declined. The BoP Economic Bulletin, published on 21 March 2022, estimates Portugal’s economic growth rate in 2022 at 4.9%, compared to 5.8% before the invasion.

Tourism has impacted…positively

The war in Ukraine is clearly affecting tourism in the neighboring countries of Ukraine and Russia. This decline in the attractiveness of these countries increases the attractiveness of Western countries.

Portugal sees tourism, one of the key sectors of its economy, gaining momentum again. Thus, the country becomes a popular destination, and the situation in the East encourages travelers to turn to other countries. According to Travelsat, a company that measures the satisfaction of tourists with their trips, the attractiveness of Portugal has increased by 3% compared to the situation before the pandemic. The British are, in particular, those who move the most towards Portugal in response to the war in Ukraine.

Therefore, we are waiting to see what will be the evolution of the tourism curve in the medium term in the country in general and in particular in relation to the number of French tourists traveling to Portugal.

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