Why is the economy of Portugal not doing better?

The economy of Portugal has been a regular feature in my analysis. After a grim period it has managed an improvement but in spite of the fact that the position should be set fair struggles appear to remain. Only yesterday the German Chancellor Angela Merkel praised it as an economic success story rather ironically on the day that the economic data raised questions about this. Indeed even the International Monetary Fund which has plenty of skin in the game via its involvement as part of the bailout troika – I believe they are still called a troika in Portugal if not in Greece – has its doubts as expressed in its statement after it latest visit.

The output recovery has so far been tepid. A recovery led by private consumption raised growth to about 1 percent in 2014.


That echoes because that is pretty much the same rate of growth that got Portugal into its current mess. What I mean by that is that it struggled to grow at a faster rate in the better pre credit crunch years and so it is hit hard when the post credit crunch contraction arrived. Of course now after all the pain and rises in “internal competitiveness” everything is supposed to be better is it not?! Accordingly I start to wonder if the estimate below will be as good as it gets for Portugal.

In 2015, growth is projected to accelerate to around 1½ percent, aided by a much more favorable external environment.


Favourable economic winds

The economic situation has a lot pushing it forwards right now. A major push will have been provided by the fall in the oil price that in terms of the Brent Crude Oil benchmark which at circa US $56 is some 48% lower than a year ago. The situation will be helped by the fall in the exchange-rate of the Euro with the trade-weighted measure having fallen from 104.43 a year ago to 91.32 yesterday. I guess the Portuguese tourist trade will have particular hopes for benefits from the fact that at 1.37 the UK Pound is some 13% stronger than a year ago. Of course the exchange-rate fall against the Euro offsets some of the oil and commodity price fall benefits but overall it is a stimulus.

Added to it have been the various measures of the European Central Bank to loosen monetary policy. It announced yesterday that it has so fat spent some 108.52 billion Euros on its latest round of QE (Quantitative Easing) bond purchases. It remain to be seen if Portuguese mortgage and borrowing rates fall in response to this but the rates at which the government borrows have fallen substantially. It is plainly a market distortion to have a country which has a substantial default risk to have a ten-year bond yield of 1.74% but there you have it.

The Labour Market

This is something about which the IMF has its concerns

At this moderate pace (of economic growth), a significant portion of the existing labor slack would not be absorbed by job creation, especially in the lower-skilled segment of the labor market. Instead, workers would likely lose their attachment to the labor market and give up searching for jobs, or migrate to look for work in other countries.


So Portugal would struggle to employ its population especially at the lower-skilled and and so many would migrate abroad. Plus ca change c’est the meme chose rather than the improvements promised by the troika. What did Portugal go through all the economic pain for?!

Latest Data

This added to the concerns as you can see below.

The unemployment rate estimate for February 2015 was 14.1%. This value is up 0.3 percentage points from the one estimated for January 2015.


Actually it is up 0.5% from the 13.5% recorded in November 2014 which in a period of supposed recovery is troubling to say the least. If we move to the employment situation which is more of a leading indicator we see a similar disappointing situation.

In February 2015, the employed population was estimated to be 4,399.9 thousand people, decreasing by 0.3% from the previous month (less 11.1 thousand people).


Indeed if we look deeper into the numbers we see that the employment gains in Portugal over the past year now only total 12,000. You would think that the favourable economic winds discussed above would prevent a fall but also we have to take account of the fact that the numbers should not be where they are.

The IMF has its doubts

If we look away from the official reports and go to the IMF’s own blog we see that it has its own doubts as to how much economic reform has taken place in Portugal.

Reforming product and labor markets could lead to a better allocation of productive inputs across sectors and sizable increases in growth (Figure 2). For example, if Italy and Portugal were to eliminate distortions within the next decade, they could boost productivity growth by at least 1½–2 percent per annum.


Actually it is quite an indictment of the IMF’s own reform process and something of an admittal of defeat.


This too has disappointed in the latest data.

Industrial Production year-on-year change rate was, in February, -1.0%, up by 0.3 percentage points from the rate
observed in the previous month. However, Manufacturing Industry year-on-year change rate was -2.0% (-0.1% in


Portugal Statistics has tried to put a positive spin on it but the numbers are weak. Of course the numbers for oil refining will not have helped but seeing as they were claimed in the boom years this is now the downside.

What about the banks?

These days modern economic policy seems to both start and stop with the banks but this from the Bank of Portugal summarising the state of play at the end of 2014 does not seem especially optimistic in spite of the spinning.

Banking system total assets continued to gradually decrease


The flow of credit impairments decreased, though remaining at a high level.


In 2014, profitability of the banking system improved (excluding BES and Novo Banco) remaining, however, slightly negative in 2014;


So things go better apart from when they got worse! Actually credit impairments rose to 7.7% of gross loans from 6.2% for example. Also solvency and capital ratios deteriorated due to this.

the revision of the actuarial assumptions followed by some banks’ pension funds.


Accordingly it is not a great surprise to note that Portuguese businesses did not seem to get great support from the banking sector in 2014.

Non-financial corporations’ debt in the third quarter of 2014 has decreased by about 4 p.p. of GDP when compared to 2013,



The situation in Portugal is troubling is this is as good as it gets then it has gone thorough all the economic pain and adjustment to perform rather similarly to how it did before. This time around it does so with a public debt some 130.2% of Gross Domestic Product so it is weaker indeed much weaker. What is required is a few years of economic growth at around the 3% per annum just reported this morning in the UK. But that seems a long way away as there is little sign of it. Even worse rising unemployment and falling employment raise spectres of the malaise that Portugal has only just escaped which will eventually ram into the longer-term problem that Portugal faces of an ageing population exacerbated by emigration of the youngest and brightest. It would be interesting to know how many Portuguese there now are just a few miles from me in “Little Portugal” otherwise known as Stockwell.

Let us hope that the better numbers such as a rare current account surplus seen in 2014 or that fact that real wages must be boosted by low and indeed negative inflation will prevail. But they have a lot of work to do.




27 thoughts on “Why is the economy of Portugal not doing better?

  1. “Reform.”
    Is that a euphemism for the denial of even basic employment rights?
    If so, is it worth a measly 1.5-2% added to GDP, bearing in mind that it will all go to the rich?
    I’d say, “Stuff your GDP growth!”

    • haha that GDP “growth” must be in prozzies and druggies

      we can impute it but we cant measure it , think of a number and put it in …..

      yes, buzzin , they can “stuff” the GDP figure , no doubt doing so will increase said “GDP” !!


    • Reform can also include tackling closed shop union cartels, tackling bribe taking bureaucrats.

      Good reforms should benefit the majority, even if this hurts special interest groups (Eg union cartels who harm consumers, or business cartels who harm consumers)

      Just look at the results of the Obamacare reforms. Coverage up, hospital bills down, hospital bad debts massively down. That’s a fabulous result of reform !

  2. Portugal and Spain are circling a demographic black hole as their populations age, the young emigrate and immigration flows have reversed. Their pension obligations are dramatically increasing at a time when (Spain) has raided the pension pot to use else where. For all the talk of economic improvement it just doesn’t appear to be filtering down and helping unemployment. I do not see any economic improvement ‘on the ground’ in Portugal and as you mention, their best hopes lie in a tourism boost from a cheaper Euro. The problem is that the Eurocrats appear keen to talk it back up again!

    Things looking even worse in Greece at the moment (if that is possible!).

    • Hi Pavlaki

      There are serious questions for Portugal and sadly as you point out the new government in Greece seems to have lost it rebellious edge. As to the demographics I was involved in a conversation on twitter earlier and the economist Edward Hugh tweeted the numbers for Portugal’s working age population. It has dropped from 7.04 million as the credit crunch hit to just under 6.8 million now. At the same time the public-sector debt has risen so per capita it makes grim reading.

  3. Hello Shaun

    So as with Portugal and the rest of the Western governments , we are still even now in the Great Emergency

    Just as MSM get used to the new Status Qou , QE “again, again ,again” , nobody except the top 0.1% are better off ……….. 6 years later ?? Really ??

    Who’s talking about that ?

    Right , no one , or no one who can get airtime !

    Still why worry ? theres EastCorrieDale on TV and football , alternatives? = none

    kool eh? get to choose a colour at the next UK election but no change on who’s in charge ….


    Roll on the summer , fun to be had soon 😉

    • Hi Forbin

      Well I enjoyed the football tonight versus Italy where we for once were outplayed but then got our way back into the game. So not a bad version of “bread and circuses”….

      You have identified the problem with the next election quite aptly, plus ca change etc…

      Better news for you on the corn front as the price has dropped today 5% today to US $3.75.

    • Hi Chris

      As the major component of Gross National Income or GNI which we pay relative too then yes. We would need to see an offsetting change in the numbers for incomes earned by us abroad minus that of non residents earned here for it not to be so.

  4. Potugal and Greece are almost bedfellows in my opinion and Italy isn’t that far behind either, but there will be a big problem if Italy fails.

    Meanwhile I suspect the Troika feel they’ve done enough to protect the banks and weaken Greece in the case of Grexit so I think the probability of Grexit is now much greater as they know Greece will fail now if it leaves which will serve as a lesson to any other errant young tykes! Greece should have left in 2010 followed by Portugal, Spain (in spite of it’s good performance whilst saying in the club) and Italy which then have consigned the Euro experiment to the dustbin for posteriority where it belongs and they could return to the good old fashioned common market – a free trade zone with their own sovereign currencies to provide some protection against inefficiencies via exchange rate and Germany? Well they’d just have to get on with their currency appreciation.

    • Greece, as if it hadn’t enough troubles is now being sabotaged by the troika.
      10 days after the election, the ECB cuts off the main source of Greek bank financing when it announced that Greek Govt bonds would no longer be accepted as collateral, a move likely to cause capital flight..
      Then in mid-Feb there was the threat to end ELA, a move likely to cause capital flight.
      There has been the limit on how much Greek banks can lend the Govt. and Dieselboom talks about Greece introducing capital controls, a move DESIGNED to cause capital flight.

      This isn’t economics anymore (if it ever was); this is nasty politics, with the EU and right-wing bankers seeking to punish Greece for having the temerity to elect a left-wing, anti-austerity govt.

      The bastards are setting out to starve people into submission.
      The Greeks now, the Portuguese to follow, and the UK’s three neo-liberal parties after the election.

      • Nothing must stand in the way of ‘The Project’. Anyone who has the temerity to object or even suggest that it is a failure will be crushed. Better to extend and pretend and move towards ever closer union even if the majority of Europeans do not want it.

      • Thanks therrawbuzzin – I was thinking of these things you mention when I posted. Troika behaviour demonstrates a confidence to kick the Greeks around because as I said above I think they now feel the banks will be protected and Greece will fail in the case of Grexit.

        What I didn’t say is that as capital has left Greece, Greek banks are increasingly looking to the Emergency Liquidity Assistance (ELA) direct finance line from the ECB for funding which was, as you say, caused by the ECB itself refusing to accept Greek Government bonds as collateral citing concerns over Greek commitment to it’s bailout pledges. ELA, being financed via Target 2 has now become a major liability to the ECB because if Greece becomes unwilling/unable to repay the ELA loans a major hit will be forced upon the Euro system i.e. the ECB. They (ECB) use this as an excuse to restrict ELA therebymaking themselves look “prudent” looking after th einteresta of the Eurosystem and the EZ taxpayer when the real game in town (imo) is an almighty gamble that Greece realises it will now fail if it leaves whereas whilst the Eurosyatem will take a big hit it is big enough to withstand it. Meanwhile, the EC and IMF look the other way in silence. If Grxit comes to pass I thing the perturbations both in Europe and globally will be far greater than the troika think.

        • Yes, you are right this is a real possibility.There is hubris in the actions of ECB, it is brinksmanship and a tightening noose for the Greeks. This could be the most obvious black swan for the Euro area however I am now convinced that the German people will rescue the Greeks. They will loosen the noose out of guilt and pity , so there will be a stay of execution for a couple more years.

        • GDP growth is well under the former 2012 predictions , the ones that came from the event “one OMT rule to save them all”. Even IMF is now saying that by 2019 GDP might(and we all know how that mighty “might” is mightly optimistic) reach 2009 level with a …. 18% natural rate of structural unemployment.
          No, there is no success , there is a lesser failure .
          And that article is no further reading that I wouldn’t be aware. That is a not a significant boos(sorry Shaun I agree with you but that is just anaemic even with that low price level)

        • To Alt – it all depends on whether you believed the 2012 predictions and when viewed relative to it’s peers Spain has indeed done well.

          If you want to debate in absolute terms and are thinking of pre 2007 growth forget it, this is the new normal, low or no growth (remember they’ve fiddled the deflators in recent years) with accompanying joblessness.

      • Alt, I’m on the IMF mail list and had a quick check back as I thought 2.5% achieved seemed high for IMF predictions back in 2012. The WEO of course only predicts a year ahead (sensibly) but I did find this from 2012 – http://www.imf.org/external/pubs/ft/scr/2012/cr12202.pdf which predicts Spanish GDP at 0.9% along with Unemployment at 24.3% for 2014.

        This, unusually, demonstrates a pessimistic outlook by the IMF when compared to the actual readings of 2.5% and 23.2% iro GDP and unemployment. I’m curious, would you post the link for the event to which you refer please. Thanks in advance.

  5. I did say a few years ago on this blog that before we see the end we could charge the people responsible (if we ever get to know the faceless few) with crimes against humanity. Upon reflection I thought the statement was a bit strong at the time but with the destruction they are to bring I think the charge would stick.

    Great blog Shaun, I’ve been following it daily from the start.

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