After growing by an average of 3.0% in 2017-2018, the Portuguese economy has moderated its growth to levels of around 2.0% in 2019. The entry into a more mature phase of the cycle and the fading of temporary support factors that drove growth in recent years are the main causes behind the more moderate expansion. Even so, this rate is sufficient to support Portugal’s convergence with the rest of the euro area without generating macro-financial imbalances.

To address 2020, we must first conduct a brief review of 2019. Domestic demand has continued to make a notable contribution to growth, similar to that of 2018. It has also continued to benefit from the strong performance of private consumption, which in turn relies on the strength of the labour market. However, it is investment that has stood out in 2019, and its acceleration has been visible in all its components: machinery, transport and construction. Nevertheless, the acceleration of investment has contributed to a greater growth in imports than in exports, meaning that the foreign sector’s contribution to economic growth has been negative (–1.2 pps). As a result, the current account and capital balance fell to 0.2% of GDP.

What can be expected for 2020?

First of all, 2020 will be marked by the prolongation of the global uncertainty factors (trade tensions, Brexit, geopolitical conflicts, etc.) that are already present in 2019. These factors will particularly affect the export sector, which will maintain a moderate rate of growth, and investment, insofar as both the increase in uncertainty and the disruptions occurring in the automotive sector could lead to the postponement of investment decisions. However, we anticipate that the deceleration of growth will be relatively moderate, thanks in part to the fact that the ECB’s accommodative policies will facilitate the deleveraging process in both the public and the private sectors, and they will support lower financing costs. In addition, if the deceleration is more abrupt than expected, there would be some scope for implementing slightly expansionary fiscal policies to dampen its effects.1

Thus, we expect the economy to grow by 1.7% in 2020, 2 decimal points less than in 2019. Domestic demand and exports will be the main drivers of growth, although their contribution will be somewhat lower than in recent years.

Domestic demand will be affected by the lower growth in private consumption and investment. In the case of consumption, in 2020 it will become even more apparent that households have already practically caught up with the spending decisions that were postponed during the years marked by the financial crisis and the slowdown of job growth. On top of this we have a savings rate at all-time lows, making high-value purchases more unlikely. Investment, meanwhile, is expected to moderate significantly, given that many companies will postpone investment decisions in a global environment marked by heightened uncertainty and lower foreign demand. However, the receipt of EU funds, the strength of residential investment and the low financing costs will continue to support growth of investment above 4.0%.

How will exports evolve?

In the current context, exports are the component that is the most difficult to predict. As such, it is worthwhile performing a more detailed analysis of its outlook, especially if we take into account its leading role in the Portuguese economy’s recovery in recent years.

In particular, we analysed the relationship between exports of Portuguese goods and services and the growth of its main trading partners. In the second chart we can see how the growth of exports began to decline, coinciding with the slowdown in the growth of key partners, which followed a similar trend. When we analyse the statistical relationship between the two variables, we see that a 1-pp decline in the economic growth of the major trading partners has a 2-pp negative impact on export growth. In this way, if we take into account that our forecasts anticipate that Portugal’s main trading partners2 will grow in 2020 by 0.1 pp less than in 2019, export growth could fall by a relatively modest 0.2 pps.

Beyond these estimates, there are risks that could erode the foreign sector more than expected. Firstly, we will have to wait and see what impact Brexit has. This is an important factor insofar as exports to the United Kingdom (Portugal’s fourth largest trading partner) represent 4.3% of Portugal’s GDP. Secondly, we will have to see to what extent vehicle production and exports could be adversely affected by the postponement of car purchasing decisions, in an environment marked by the deep structural changes of the sector and regulatory uncertainty.

In spite of the risks underlined, one element to keep in mind is that the importer content of Portuguese exports is high (1 euro exported translates into a 44-cent increase in imports). Therefore, the slowdown in exports would result in imports also registering a more moderate growth, mitigating the negative impact of foreign demand on growth.

Will it be a good year?

To do this, we make a small model to predict GDP growth in 2020 based on the expected trend of consumer, industry and services confidence indicators.3 In this regard, the prediction exercise indicates a GDP growth of 1.8% in 2020, very much in line with our forecast (1.7%). Furthermore, we estimate that the probability of growth exceeding 1.5% stands at 72%, while the probability of growth being below 0.6% is estimated to be less than 5% (0.6% would mean nil quarter-on-quarter growth in the four quarters of the year).

In short, the Portuguese economy is currently more resilient than it was in previous episodes of global slowdown. This time, it has much more solid foundations thanks to the strengthening of competitiveness, the reduction of significant imbalances (the reduction in private debt deserves special mention) and the structural reforms implemented in recent years.

Daniel Belo and Teresa Gil Pinheiro

1. In addition, the increase in the salaries of public sector workers that has already been approved could have a positive impact on household consumption in 2020.

2. 86% of all exports of goods and services go to 20 different countries. In order of importance, these include Spain (~20%), France (~13%), Germany (~11%), the United Kingdom (~10%), and the US (~5%). Angola and Brazil are in 8th and 9th place, respectively, with market shares of less than 3%, while China is in 15th with only a 1% share.

3. We predict the values of these indicators in 2020 using an AR(1) model, and then use these predictions to forecast growth in 2020. We then plot GDP growth against the consumer and business confidence indicators. The main specification is