Portugal: OECD revises downwards 2017 GDP

  • ECO News
  • 29 November 2016

The government projects a 1.5% GDP growth for 2017, but the OECD is less optimistic, having revised downwards the goal to 1.2%. However, the organization compliments the Portuguese fiscal policies.

In June’s economic perspectives, the OECD projected an increase of the Portuguese GDP, in 2017, of 1.3%. In a similar report, brought forward this Monday, but concerning November, the Organization for Economic Co-operation and Development has revised downwards the economic growth for the upcoming year to 1.2%. This percentage compares to the 1.5% the Portuguese government had projected in the 2017 State Budget draft.

GDP growth in 2017

Data: Ministry of Finance (MF); OECD (percentage values). SP – Stability Programme. SBd – State Budget draft.

“GDP growth is projected to remain subdued”, the organization writes in their Economic Outlook (preliminary version) from November. This is how the OECD classifies the Portuguese economic progress for the following year. This is a tendency that will be seen also in 2018: the organization predicts a 1.3% growth, which is far beyond the 1.9% goal set by the Stability Programme on April of 2016.

The OECD compliments the increase in indirect taxation

For Portugal, according to the OECD, the challenge is to reach a balance of having “fiscal sustainability” without affecting the economic perspectives. However, the organization leaves a compliment to the path taken on by the government in terms of taxation: “On the tax side, the projected shift from income to consumption taxes is welcome as it will support production by reducing distortions”.

Ángel Gurría, secretary-general of the OECD, presenting the November Economic Outlook.

In the analysis made by the OECD, the compliment goes to the tourism and manufacturing sector, the two main growth pillars for exports. The criticism goes to the structural unemployment that remains too high, in spite of the OECD recognizing the unemployment rate has been decreasing.

Fragile banking sector creates “high uncertainty”

One of the OCDE’s main concerns is the fragile banking sector. At issue is the “hold back” of private investment that does not reach the economy, mainly because of the “high uncertainty”. Additionally, public investment is “historically weak” to meet the deficit goals, states the OECD and, therefore, the increase planned for 2017 is “welcome”, as it can support economic growth.

But the danger in the banking sector goes beyond the investment. The OECD states the risks are very significant, since the banking sector remains exposed to “sovereign debt” and, in the future, “could require more public support”. In order to prevent that from happening, the OECD states a “faster resolution of non-performing loans and a stronger recapitalization of the banking system could restore confidence and boost investment financing”.

Furthermore, the OECD points to a “high unemployment” which will restraint consumption growth. Inflation should remain low. As for public debt, the OECD states in their Economic Outlook: “At about 130% of GDP, public debt remains very high despite significant progress achieved in fiscal consolidation, severely limiting fiscal space. […] Additional revenue could be raised by reducing exemptions and limiting the use of reduced rates”.

Here are the advice the OECD gives Portugal in the Economic Outlook of November 2016:

  1. Instigate investment and productivity in order to increase life-quality and economic growth;
  2. Revising administrative procedures in order to simplify them (the OECD suggests limiting discretionary powers of municipalities);
  3. Improve the judicial efficiency to facilitate insolvency procedures;
  4. Easing entry barriers in professional services;
  5. Removing distressed legacy loans from bank balance sheets, namely the nonperforming loans;
  6. Opening up new sources of financing to facilitate investment;
  7. Expand adult education and using vocational education as a way to have more skilled people, which will raise productivity;
  8. Plan a structural reform on tax revenue and expenditure to achieve permanent reductions in current expenditures, namely regarding the number of staff working for the State.