Portugal: Political stability to support economic growth in …

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(MENAFN- ING) We see economic growth rebound in 2022

The latest Gross Domestic Product report showed that the Portuguese economy grew by 4.9% in 2021, the highest growth figure since 1990. The economy was able to grow relatively well in the last quarter of the year (1.6% QoQ), implying the economy is now only 1.5% smaller than before the pandemic.

For the first quarter of 2022, we expect a slowdown due to the Omicron wave, but thereafter we expect growth to resume. Activity is expected to return to pre-pandemic levels in the second half of 2022. For 2022 as a whole, we expect economic growth of 5.5%.

The strength of the labor market should support activity. The unemployment rate was 5.9% last December, which is lower than it was before the pandemic. As we expect demand to remain high from the second quarter and the number of companies reporting labor shortages is currently limited, we expect the unemployment rate to continue to decline.

Political uncertainty is now less

Political uncertainty decreased markedly at the start of the year. The previous government fell in October 2021 because the radical left parties did not support the 2022 draft budget. The radical left parties wanted to change labor laws and increase social spending. In snap elections held in January, however, the Socialist Party unexpectedly won a majority in parliament. This will facilitate the approval of the initial budget.

The socialist government is likely to remain fiscally cautious, although a significant portion of the budget will likely invest in the national health service and raise the minimum wage. Raising the minimum wage in times of high inflation could cause problems for businesses.

Reduced political uncertainty, coupled with a strengthening labor market, could also make consumers more confident, which in turn could reduce precautionary savings. Currently, the savings rate is 11%, about four percentage points higher than before the pandemic.

A more stable majority will also help secure funds from the Next Generation EU fund. Portugal is expected to receive €16.6 billion (around 8% of 2021 GDP) over the next three years. This should reinforce the current low levels of public investment in Portugal.

Overall, the outlook is positive for the Portuguese economy. A solid labor market, combined with less political uncertainty and a fiscal boost from Europe, will support activity. For 2022 and 2023, respectively, we forecast economic growth of 5.5% and 2.5%.

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