Bank of Portugal sees economy growing 1.7% in 2020, less than the government

The Bank of Portugal improved the outlook for the growth of the Portuguese economy next year, pointing to a growth of 1.7% instead of the 1.6% it predicted in June. Even so, the central bank is more pessimistic than the government, which in the state budget for 2020 sees GDP grow by 1.9%.

The economy is expected to grow 2% this year, in line with the previous forecast, and is already in a deceleration phase that will continue over the next few years, says the Bank of Portugal in the December issue of the Economic Bulletin, published this Tuesday.

Thus, for next year, the improvement in economic growth projection by 0.1 percentage points is mainly explained by the higher contribution of domestic demand: it will be 1.3 percentage points (p.p.) instead of the 1.1 p.p. initially projected in June. The December issue of the Economic Bulletin already incorporates the update of the national minimum wage, which will rise from 600 euros to 635 euros next year.

The greater dynamism of domestic demand will offset the deterioration of external conditions, such as “protectionist tensions, increased uncertainty, factors associated with Asian economies and the automobile industry,” points out the Bank of Portugal. These reasons lead the institution to worsen its estimate for export growth. Foreign sales should grow less in 2020: 2.6% instead of the 3.1% projected in June. In this scenario, the contribution of the exports component to GDP growth next year will be 0.4 p.p. instead of 0.5 p.p.

Unemployment decreases less

For the labour market, the projections for 2020 and 2021 are more modest, especially in terms of reducing the unemployment rate. Even so, the Bank of Portugal considers that the country will reach 2022 with a “historically low” unemployment level, registering a rate of 5.6% in that year.

While the unemployment rate closes at 6.3% this year – still better than the 6.4% forecast in October – in the following years there will be an upward revision of the projection: in 2020 the unemployment rate will decrease to 5.9% instead of 5.7%; in 2021, instead of 5.3%, the unemployment rate will drop only 0.1 points to 5.6%, remaining at that level the following year.

In relation to job creation, the Bank of Portugal maintains the growth rates for 2020 and 2021: 0.8% next year and 0.4% the following year, maintaining the forecasts announced in June. For 2022, employment growth will be almost nil: 0.1%.

In this scenario, the central bank forecasts nominal wages with higher growth rates than in recent years, anticipating that they will rise more than productivity.

Mature economic cycle

The December issue of the Economic Bulletin presents new projections for 2022, which consolidate the scenario of deceleration of the Portuguese economy “as a result of a process of maturation of the economic cycle – also observed in other advanced economies,” a phase in which growth levels are close to the pace of potential growth.

According to the central bank, the economy will grow by 1.6% in 2022, maintaining the expansion recorded in 2021.

The Bank of Portugal points to several structural constraints that weigh on potential growth – which corresponds to the high use of an economy’s resources – such as “adverse demographic evolution and dimensions that condition the growth of productivity per worker”.

Therefore, “these constraints should be the main axes of economic policy action, with emphasis on measures that promote increased productivity,” points out the central bank. “In a context of limitations to the increase in labour supply, productivity becomes the crucial growth factor for the Portuguese economy and its resilience to the challenges of the next decade, which also include the rapid technological transformation underway and environmental sustainability,” adds the institution.