Portuguese economy: still a long way to go!

The October edition of the Courrier International had the following title on its cover page: “Portugal, le nouvel Eldorado”. But is it really one? In the last few days, the Bank of Portugal released two documents about the Portuguese economy: on Friday, the Economic Bulletin, followed on Monday by the e-book  “Portuguese economic growth: A view on structural features, blockages and reforms”. The snapshot of the Portuguese economy reveals that the Eldorado is still a mirage.

Portuguese firms are small, with modest innovation and investment, and very leveraged. Moreover, not all the credit is flowing into the right hands. More than 35% of the bank loans in 2016 was given to firms that are either zombie or non-productive. Zombies are firms that report interest spending above their earnings in at least three consecutive years and are older than ten years old, which are kept alive artificially through long-term relationships with banks. They tend to be bigger than other firms and therefore capture a substantial share of the economy’s resources, dragging down productivity, investment, and innovation in the economy. Zombies accounted for 8.5% of the total in 2013, and decreased steadily after that. Even if the reform of the bankruptcy laws between 2012 and 2015 has made it more likely that zombies leave the market, as of 2016 they still represent around 10% of the stock of bank loans. Therefore, even if corporate debt has decreased in the last years, both as a percentage of GDP and firms’ assets, there is a lot to be done. A relatively good sign, given the recent record, is that the new credits are mostly being allocated to the firms that invest the most.

Turning to the workers, the e-book dedicates a number of chapters to the skills of the working population. The country has invested massively in education, with obvious results: in the 30 years between 1998 and 2018, the share of adult population with secondary school more than doubled from 10 to 22%, and the share of university graduates more than tripled from 6 to 19%. The average education level of the workforce will go on increasing as older, less educated, generations leave the labour market and new generations take up new jobs. However, there are worrying signs about the extent to which the economy is taking full advantage of the skill level of the new generations. The wage premium of higher education started decreasing in the nineties, more so for the young generation. The analysis of the skills mismatch – i.e., whether jobs are taken by people with the right skills – reveals that there are around 40% of the workers who are under-skilled for their jobs, while there are less than 5% who are over-skilled. However, over-qualification is more of a problem among young workers. Moreover, while the overall unemployment rate has hit a 28-year low level of 6.4%, it still hits 20% of the youngsters.

It is fair to say that the Portuguese economy has improved in the last years, which helped the re-election of the incumbent socialist prime minister António Costa. However, there remains a lot to be done to tackle its crucial fragilities. The task is formidable, and it is unlikely that the government will deliver an Eldorado in just four years.