How has the Euro era worked out for the economy of Portugal?

It is time again to take a look at the economy of what is the oldest ally of England and Wales. Yes so old that it precedes the union with Scotland. This is because there is news on economic developments in Portugal both from it and the International Monetary Fund or IMF. Having been involved in a program for Portugal the IMF is keen to open with a positive spin on things.

Portugal has achieved a major economic turnaround since the onset of the sovereign debt crisis. Access to financing was restored following the large fiscal adjustment, the external current account position has moved from a large deficit into surpluses, while the unemployment rate—though still at high levels—declined sharply.

Actually there is a bit of a flicker of old era IMF here as we note the emphasis on the current account but there is a catch in that Portugal has not been able to avail itself of the next part of that play book which is a lower currency due to its Euro membership. Also we should welcome the lower level of unemployment.

A very familiar theme

It is kind of the IMF to confirm that my major economic theme on Portugal is in play. For newer readers it goes as follows. Whilst Portugal has down turns sadly in the good times it only manages economic growth of about 1% per annum. So let us note that according to the IMF “Good Times” by Chic should be on the turntable.

still-favorable cyclical tailwinds and supportive macroeconomic policy settings. The fiscal loosening in place since last year and the ECB’s appropriately supportive monetary policy stance…….. Historically low yields, notwithstanding occasional bouts of volatility, have afforded the public and household sectors relatively easy access to finance, and facilitated an expansionary fiscal stance since 2015

And yet.

The slowdown in economic activity that began in the second half of 2015 has persisted.

Putting that another way economic growth in the last three-quarters has gone 0.2%,0.2% and then 0.3%. If we note the lower oil price and all the monetary easing that is not much of a return and reminds me of my 1% cap on economic growth. Also as the IMF implies but does not say the way that the bond buying of the ECB has depressed Portuguese bond yields has allowed its government to spend more.

Looking Forwards

The IMF tells us this.

the 2016 growth forecast has been revised down, from 1.4 to 1.0 percent for this year.

Actually they think the same for 2017 as well as 1.1% the forecast which of course returns us to my theme. Let us now examine why they think this. Firstly we get something very familiar.

Directors emphasized that pushing ahead with structural reforms remains critical to enhancing competitiveness and promoting growth. They encouraged the authorities to fully implement the already-enacted reforms in labor and product markets,

I will leave the IMF to explain how you need to push ahead with something you have already implemented! The reality is of course that far fewer reforms have happened than claimed.

Also another regular theme mentioned yesterday and back on the 25th of July appears.

As banks continue to struggle with a large stock of NPLs, low profitability, and high operating costs, they are unable to reduce corporate indebtedness and provide adequate lending for investment.  (NPLs are Non Performing Loans)

This particular mess is self-reinforcing as of course a weak economy weakens the banks in the same way that weak banks weaken the economy.

Recapitalization needs of the largest bank Caixa Geral de Depósitos (CGD) and possible losses from the sale of Novo Banco may necessitate further injections of public money

There is also an issue with investment which the IMF skirts a little so let me switch to Portugal Statistics or INE.

Investment recorded a year-on-year change rate of -3.0% in volume in the second quarter, after a reduction of 1.2% in the previous quarter.

Same as it ever was

This bit is rather familiar from Portuguese economic history.

The ongoing recovery has largely been consumption-driven. Household consumption has grown by 10 percent between 2013Q1 and 2016Q1, even though disposable income has only increased by 4 percent over that period.

There is a glaring problem there as this looks unsustainable especially as we note this.

an unprecedented decline in the savings rate,

This type of growth has an issue.

The current account posted a surplus in 2015 for the third year in a row, but some weaknesses are emerging.

It is good that the balance of payments improved but it did have a following wind via the fall in commodity prices. We will see going forwards if it can be sustained. Here is the latest data which simultaneously boost recorded GDP and poses a question or two.

In the quarter ended in July 2016, exports of goods decreaseit wasd by 2.3% and imports of goods declined by 3.9%, when compared with the quarter ended in July 2015.

According to the Bank of Portugal tourism is a bright spot.

The ‘Travel and tourism’ item posted a positive balance of €4,385 million, i.e. 11.5 per cent more than in the same period of 2015

More austerity

Actually both Portugal and the IMF are in something of a mess here! Remember the U-Turn the IMF did on austerity and fiscal stimulus? Well not here.

A credible fiscal adjustment is therefore needed to put public debt on a firmly downward trajectory and ensure the medium-term sustainability of public finances.

Okay how much?

A structural primary adjustment of 0.5 percent of GDP in 2017 and 2018 would be an appropriate fiscal path, but that should be underpinned by credible measures.

They have little faith in the current plans it would appear and they are switching Portugal from a small fiscal stimulus to a contraction which if the economy does slow may well plunge it back into the mess it was so recently in.

The Bank of Portugal has told us that the national debt was 240.9 billion Euros at the end of July which makes the national debt to GDP ratio just under 132% by my calculations. This is a number which is always supposed to fall but yet keeps rising even in this better phase for the economy.

In terms of cost of the debt this is being kept under control by the QE bond buying of the ECB.


This is a nuanced situation as whilst it has improved it is still high.

In July 2016, the provisional estimate for the unemployment rate was 11.1%, remaining unchanged from the definitive previous month’s level.

It is not a good time to be young although again the numbers have improved.


The overall problem can be summarised thus. Back in the second quarter of 2004 Portugal had a GDP of 43.3 billion Euros and in the second quarter of 2016 it was 43.1 billion Euros. Thus we see yet another economic depression in Europe. Meanwhile the lack of economic growth saw the national debt to GDP ratio soar from 61% in 2004 to 132% now.

If we jump back in time to 2004 the European Commission told us this about Portugal.

Starting in early 2001, growth dwindled and the economy slipped into recession in late 2002. In 2003, GDP is estimated to have fallen by ¾%, almost the weakest
performance among EU Member States.

How is the Euro working out for Portugal? Also the future does not look so bright.

Portugal is projected to face large adverse demographic developments. According to UN projections, Portugal’s population has started to decline (by 2.2 percent between 2010 and 2015), and would further shrink by about 30 percent by 2100 in the baseline scenario,

I can vouch for some of the migration as for example Stockwell also has the name Little Portugal.


13 thoughts on “How has the Euro era worked out for the economy of Portugal?

  1. Great blog, Shaun.
    So, over a twelve year period, GDP has not moved, but debt has more than doubled (and would be impossible to service without the market rigging known as QE).
    I am amazed that, given the length of the Euro experiment and the utter lack of progress for Portugal (or Italy/Spain/Greece), there isn’t more of an economic discussion as to the merits of being in the Euro in southern Europe. Exactly what benefit has it brought to these countries, which obviously cannot compete and which have borrowed too much on the strength of Euro-wide capital access to cheap money?
    It is as though there is a conspiracy of silence over this issue, IMHO.

    • Hi poppyred1 and welcome to my corner of the web

      There is another factor I think which is that the southern Europeans lost confidence in their governing classes and establishments a while ago and hoped that Europe would do a better job. In the mix there was a hope that the UK would play a role as a counterbalance to Germany when in fact we are now moving away.

      The European establishment has now let them down as well…

  2. I wonder what has happened to the billions of non performing loans in Portugal (and vastly more in Spain) that resulted from the property crash? Whilst the market has picked up a bit there must be many loans to developers, that have since gone bust, sitting on the books somewhere. The figures were colossal at the time so I doubt they have been magicked away!

  3. “I will leave the IMF to explain how you need to push ahead with something you have already implemented! The reality is of course that far fewer reforms have happened than claimed.”

    I think they mean the labour and product market reforms have been enacted in legislation but not enforced. They are giving the Portugese Government a disguised smack.

  4. Great blog as always, Shaun.
    It reminds me of the joke of someone from Portugal being asked if Portuguese has a word that is equivalent to the Spanish word mañana, literally meaning tomorrow, but often used to refer to sometime vaguely in the future. He replies “Yes, we do, but the Portuguese expression lacks the same strong sense of urgency.”
    I noticed that the OOH(NA) series were updated by Ruth Donovan of ONS for 2016Q2 and at the same time the series was revised back to the start to incorporate the new HPI data. The impact of it is generally to show less inflation than before. While it is reasonable that the ONS would want the OOH(NA) series to be based on the housing price index it now stands behind, I suspect it has taken the series farther away from the truth, rather than closer to it. Even as it is though, it is obviously superior to its CPIH counterpart. The OOH series for CPIH increased by 2.3% in 2016Q2 up from 2.0% in 2016Q1. The OOH(NA) series increased by 3.4% in 2016Q2, up from 3.0% in 2016Q1. (The inflation rate for 2016Q1 does not seem to have been affected by the revision.)

    • Hi Andrew

      Thanks for the reminder about that series it may be just us two who follows it! However it is plainly troubled as you say so whilst it is the best we have I agree that it misses the target.

      The view at the latest RSS meeting was downbeat on it, in that Eurostat may well give up on it because of the number of European nations who do not have house price indices reliable enough to used for it.

  5. Rodrigo Rato is going on trial in Spain. It will be interesting to see if accountability in Ireland and Spain can be related to better economic recovery within the eurozone.

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