Portugal: Economy off to the races in Q1
May 31, 2017
Portugal’s economy flew out of the traps in the first quarter of the year, registering the highest quarter-on-quarter (qoq) growth rate in seven years (Q1: +1.0% qoq; Q4: +0.7% qoq), according to revised figures published on 31 May by the National Statistics Institute (INE). On a year-on-year basis, growth shot up to 2.8% from 2.0% in the prior quarter. The positive figures come after the economy began to flex its muscles in the second half of last year thanks to robust private consumption and a booming tourist sector. The country has gone from being one of the Eurozone’s sickliest economies to being granted a fairly clean bill of health in fiscal terms earlier this year after the European Commission dropped Portugal from the Excessive Debt Procedure (EDP).
On the domestic front, private consumption growth remained solid in Q1, likely fueled by a rapidly improving labor market and greater optimism among consumers (Q1: +0.8% qoq; Q4: +1.1% qoq). Fixed investment also rose as businesses reacted to improved domestic and external demand, despite a tough Q4 comparative and a drag from inventories (Q1: +2.1% qoq; Q4: 6.0% qoq). However, public consumption was flat, as the government continued to exercise spending restraint in order to attempt to strengthen its fiscal position further (Q4: +0.1% qoq).
The external sector stole the show in the first quarter of the year, with exports jumping as Portuguese firms profited from improved demand in the Eurozone and the tourism sector remained highly dynamic (Q1: +3.1% qoq; Q4: +2.7% qoq). Imports rose by a more moderate 1.2% (Q4: +4.8% qoq), with the external sector’s net contribution swinging from minus 1.0 percentage points in Q4 to plus 0.8 percentage points in Q1 as a result.
After shooting out of the blocks at a blistering pace in the first three months of the year, there are doubts over whether the economy can go the distance, and growth is expected to lose some steam in the quarters ahead. That said, the economy will remain in much better shape than it was a few years ago. Private consumption growth should remain robust, supported by falling unemployment and an increase in the minimum wage, while fixed investment should also increase at a canter, thanks in part to greater public investment. On the external scene, exports and imports look set to rise at similar rates, with the net contribution of the external sector likely to be limited as a result. One significant hurdle yet to be cleared is the feeble financial system; banks remain saddled with bad debts and could become exposed if financial conditions tighten.
Author: Oliver Reynolds, Economist