Economists from Fitch give a warning: employment will no longer help GDP

  • ECO News
  • 5 September 2017

BMI Research says that earnings in employment and their effects on GDP are not sustainable in the long run. Fitch's economic analysis unit made an upwards revision of the 2017 GDP to 2.5%.

The positive contribution of employment to the growth of the Portuguese economy is not sustainable, according to BMI Research. Fitch’s economic analysis unit argues, in a report disclosed this Monday, that the earnings from the labor market are already at their limit.

“A big reason GDP growth jumped in Q217 was that employment growth soared to 3.5% y-o-y, the highest figure since 1998, returning the number of employed to Q311 levels. The question now is whether recent employment gains can be sustained“, wonder BMI Research experts. In their report, they answer that it is not possible, because in order for it to happen, Portugal needed to increase its current workforce.

“Portugal’s economic recovery will become increasingly challenging as the rapid gains in employment that have fueled GDP growth are set to slow sharply over the coming years”, the report states. However, analysts believe that in the future, productivity will make a larger contribution to GDP, in spite of the “structural constraints” that limit an economic expansion.

Although they are less optimistic about the future, BMI Research made an upwards revision of the 2017 GDP, from 1.4% to 2.5%. For 2018, the unit’s experts also made an upward revision of the economic growth, from 1.2% to 1.9%. This deceleration BMI Research predicts takes into consideration that, right now, the GDP increase has had a strong contribution from employment, but a weak contribution from productivity.

The report considers that next year, Portugal will be close to “full employment” and, therefore, GDP will have a smaller contribution from that component. “Further gains in employment beyond that point would require an increase in the working age population or an increase in the participation rate, but neither seems likely”, experts argue.

Why? “Even with dramatic reforms, it is difficult to see the labor force participation rate rising much further from its current level of 80%, which is above the eurozone aggregate of 78%”, is stated in the report. The same is to say that the contribution of employment to GDP is “in the past”, sates BMI Research. And, therefore, “productivity growth will likely have to pick up for Portuguese growth to maintain anything near the pace it has set for the past two years” — which will be “challenging”, experts estimate.

“The sectors in which Portugal has a competitive advantage are typically of low productivity” are the main issue, states the report, and they give the example of tourism. In addition, the investment in the corporate sector has been “dismal” and BMI Research estimates a boom will be difficult because of restrictions in the financial sector. “There is a long way to go before companies are in a position to leverage up and banks are ready to lend”, the Fitch’s unit states.

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