Portugal Economy Facts
Portugal experienced stable economic growth from the EU accession in 1986 until a budget crisis emerged in the early 2000s. The global financial crisis of 2008 hit the country hard and the Portuguese have since seen their standard of living fall as unemployment rises and the country has serious problems with paying off its high government debt. A major budget deficit forced Portugal in May 2011 to take out an emergency loan from the EU and the International Monetary Fund (IMF). The condition for the loan was a tough austerity policy, which affected large sections of the population. In the mid-2010s, a certain economic recovery could be discerned.
Portugal has since the fall of the dictatorship 1974 developed from a poor fishing and agricultural country with large labor migration to a modern economy dominated by the service sector where tourism is an important part. In the mid-2010s, the tourism industry accounted for around one-sixth of the gross domestic product (GDP) and employed almost every fifth Portuguese. Manufacturing of cars and textiles are other important industries.
- Countryaah.com: Major imports by Portugal, covering a full list of top products imported by the country and trade value for each product category.
After Portugal joined the EU, the country experienced several periods of rapid growth and began to catch up with other western European countries economically. Growth was particularly strong during the second half of the 1990s due to the liberalization of the economy, increased exports and large investments from other EU countries, mainly in the financial and real estate sectors. The good investment climate was largely created by the fact that the wage situation in Portugal was low compared to other EU countries. Another important reason for the upturn was contributions from the various EU support programs. These mainly went to basic infrastructure, care and education. In 1999 Portugal became a member of the EU’s monetary union EMU and in 2002 the escudon was replaced by the euro as its currency.
Budget deficits are growing
Increased competition from low-wage countries in Central and Eastern Europe as well as in Asia led to a clear slowdown in the economy in the early 2000s. Investments decreased, as did tax revenue. At the same time, government spending increased. Soon, the country was facing a budget crisis. In 2001, Portugal had a budget deficit that far exceeded the 3 percent of GDP that applies to EMU members. To avert sanctions from the EU, the government raised taxes and cut back on the large public sector and sold state property.
- Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including PRT which represents the country of Portugal. Check findjobdescriptions to learn more about Portugal.
But the economic problems persisted. Inflation increased and GDP shrank by just over one percent in 2003. Many companies collapsed and unemployment skyrocketed. In 2005, the budget deficit appeared to be record-breaking, leading to new austerity. A large number of public servants lost their jobs and for those who remained expected increased taxes and reduced benefits. Among other things, the retirement age was raised from 60 to 65 years. In the summer of 2005, the European Commission postponed Portugal to 2008 by lowering the budget deficit to the highest allowed level in the euro zone.
Basically, Portugal’s economy is still plagued with weaknesses that stem from the dictatorship’s mismanagement of state resources. The level of education is still low, although improvements have been made, there is a shortage of trained staff and the bureaucracy is extensive. Most jobs are found in unqualified low-wage industries, such as the textile industry, which lost ground to competitors when the world market was deregulated. Another problem is that Portugal today has a hard time competing for EU contributions with the Union’s newer member countries in Central and Eastern Europe.
Deep economic crisis
The global financial crisis 2008-2009 created new difficulties for the country, whose budget deficit in early 2010 had slipped to over 9 percent of GDP. The government was forced into new tough measures, such as raising taxes, substantial savings in the public sector and new sales. Together with the EU, Portugal set the target of reducing the budget deficit to 7.3 percent in 2010 and 4.6 percent in 2011. Growth in 2010 was 1 percent and central government debt was estimated at 82 percent of GDP in the same year.
Despite the government’s measures, the credit rating agency Fitch lowered Portugal’s credit rating in December 2010, which severely hampered the country’s borrowing opportunities in the financial market and made the loans more expensive. Eventually, it became clear that the government did not meet the target of the 2010 budget deficit.
After the National Assembly voted in March 2011 against the government’s proposal for yet another austerity package, government finances deteriorated rapidly. In April, the credit rating agency Moody’s also lowered the country’s credit rating, which further raised interest rates on central government debt. In the same month, Portugal was forced to apply for EU emergency loans to cope with the crisis. A loan of EUR 78 billion was granted by the EU, the European Central Bank (ECB) and the IMF one month later, which solved the country’s acute debt crisis. The central government debt had then risen to 107 percent of GDP.
The strictest budget in modern times
The Portuguese government then struggled to comply with the conditions associated with the emergency loan, including many new savings in the public sector (infrastructure projects managed in the future, schools merged, as well as health centers, social security systems were further reduced and government employees’ salaries and pensions were frozen until 2013, staff were cut down etc). In addition, there were a number of new tax increases (income, businesses, VAT etc) and demands for far-reaching economic reforms, such as abolishing monopolies on goods, removing subsidies and making the labor market more flexible (not least making it easier to dismiss staff). Privatizations in, for example, the transport, energy and insurance sectors were also required. The goal was to reach the eurozone three percent limit for the 2013 budget deficit.
In the lenders’ first quarterly evaluation of the emergency loan in August 2011, Portugal received praise for adhering to the agreement. A new loan disbursement of EUR 11.5 billion was therefore made according to plan. In the autumn, however, it was clear that Portugal would not meet the budget deficit target in 2011, and its credit rating in the market was further lowered. In November, Portugal was criticized by analysts for not making any progress in economic reforms. The same month, the National Assembly adopted the government’s 2012 budget, which was described as the most stringent in the country in modern times.
The Portuguese economy shrank by 1.5 percent in 2011. In January 2012, the credit rating agency lowered Standard & Poor’s Portugal’s credit rating to so-called junk status, thus following Moody’s and Fitch’s previous assessments. But in the EU and IMF’s February evaluation, Portugal received praise and a new charge of money was paid out: EUR 14.9 billion. The same month, the government announced that the country had implemented 60 percent of the privatizations included in the rescue package. Also in the fourth quarter evaluation in May 2012, Portugal was approved and thus received an additional EUR 4 billion.
The support program ends
When budget cuts led to reduced tax revenues, Portugal was allowed to meet the budget deficit in the autumn of 2012, as the country followed the lenders’ recommendations. In January 2013, another part of the support package was paid out. In addition, Portugal’s interest rates fell, and the country was able to take a large five-year bond loan in the open capital market, the first since the EU and IMF emergency loans in 2011.
In 2012, GDP fell by more than 3 percent, and by the end of the year, unemployment had risen to 17 percent. At the end of 2013, however, signs emerged that the economy was beginning to recover instead. Exports, not least of shoes, increased at the same time as imports fell. Revenues from the tourism industry also rose.
In 2013, the government struggled to meet the lenders’ demands that the budget deficit be reduced to 5.5 percent. For 2014, the requirement was 4 percent. The government hoped that the lenders would push for that limit, but it was rejected at a meeting with the euro group in autumn 2013.
In November, credit rating agency Moody’s upgraded its forecast for the Portuguese economy to “stable”. After the first half of 2014, the lenders’ support program came to an end, and the intention was that Portugal would then manage its own financing.
The economy is starting to grow again
In 2014, the Portuguese economy also began to grow again, albeit at a slow pace. The recovery was largely due to increased domestic consumption. Exports also gained momentum during the year despite one of Portugal’s most important export countries, Angola, having financial problems due to falling oil prices. Foreign direct investment also increased. In 2014, central government debt represented just over 130 per cent of GDP.
The economic recovery continued in 2015, largely due to falling world market prices for oil and low interest rates. The budget deficit this year reached 3.5 percent of GDP, ie slightly higher than the EU’s 3 percent allowed. Government debt remained at the same level as 2014.
However, a certain concern arose when Banco Espirito Santo, Portugal’s leading bank, collapsed in the summer of 2014. The state was forced into a rescue operation which involved dividing the bank into a “bad” and a “good” part. To finance the operation, the latter, Banco Novo, was put up for sale. However, the bids received were considered too low and in the spring of 2016 the bank announced heavy cuts. Another bank, the Madeira-based Banif, collapsed at the end of 2015 and the state again had to intervene. The “good” part of Banif was then sold to the Portuguese subsidiary to the Spanish bank Santander.
At the end of 2015, Portugal received a socialist minority government, which was dependent on the support of several small left parties (see Current policy). In order to avoid a government crisis, it had to strike a balance between demands from the EU and the support parties. In its 2016 budget, where the government (well) optimistically projected growth of 2.1 percent which could reduce the budget deficit to 2.6 percent of GDP, increases in pensions and salaries of civil servants were announced, as well as the minimum wage. In addition, some canceled holidays would be reintroduced.
Only after Portugal negotiated new taxes on banking transactions, fuel and tobacco was the budget approved by the European Commission, which was concerned that the budget deficit would increase after it agreed with the IMF that growth would only rise to 1.6 percent. When, in May 2016, it became clear that the country’s budget deficit was at 4.4 percent, the European Commission nevertheless chose not to impose a fine, but gave Portugal (together with Spain) respite to remedy the problems.
In July, however, the European Commission declared that Portugal was not trying to fix its budget deficits quickly enough, and it seemed that it would be fined, after all, for the first time in EU history. However, the European Commission refrained from imposing fines. They referred to Portugal’s difficult financial situation and that the Portuguese made great sacrifices. There was also obviously a concern within the Commission that harsh sanctions could lead to increased popular opposition to the EU in the wake of the British decision to leave the EU (Brexit).
Instead, Portugal was forced to settle the budget deficit until the end of 2016/2017. Even in the fall of 2017, the European Commission expressed some concern over the Portuguese budget deficit, but this time there was no threat of a fine. At the same time, the European Commission expressed concern about growing social divisions in Portugal, with the richest one-fifth of the population earning almost 6 times as much as the poorest one-fifth.
A positive sign was that foreign investment in the country had tripled between 2014 and 2017. The economy has also grown since 2014, and from 2017 the central government debt has decreased. It also went well for the country’s tourism industry. By 2018, the budget deficit had been largely eradicated, but at the same time it was clear that necessary investments, including in the transport sector, were lagging behind.
FACTS – FINANCE
GDP per person
US $ 23,146 (2018)
US $ 237 979 M (2018)
2.1 percent (2018)
Agriculture’s share of GDP
2.0 percent (2018)
Manufacturing industry’s share of GDP
12.4 percent (2018)
The service sector’s share of GDP
65.0 percent (2018)
0.9 percent (2019)
Government debt’s share of GDP
120.1 percent (2018)
US $ 67,317 million (2018)
US $ 84,625 M (2018)
– US $ 1,508 million (2018)
Commodity trade’s share of GDP
66 percent (2018)
Main export goods
agricultural products (eg wine), machinery, electrical equipment, vehicles, clothing, textiles, shoes, pulp, cork
Largest trading partner
France, Germany, Spain