Portugal: Growth slows in Q2, but overall economic picture remains positive
August 31, 2017
Portugal’s economy decelerated in the second quarter of the year according to revised figures released by the National Statistics Institute (INE) on 31 August. Growth came in at a revised 0.3% quarter-on-quarter in Q2 (previously reported: +0.2% quarter-on-quarter), down from Q1’s stellar 1.0% expansion, which had marked a multi-year high. On a year-on-year basis, growth was clocked at a revised 2.9% (previously reported: +2.8% year-on-year), up from 2.8% in the first quarter. Despite the slowdown in quarterly terms, the economy still looks in fairly good shape: The tourism industry is booming, unemployment has fallen over the last year and the European Commission removed Portugal from the Excessive Debt Procedure (EDP) in June following encouraging public finance data.
On the domestic front, private consumption contracted 0.2% qoq in Q2 following a strong first quarter (Q1: +0.9% qoq), driven by a fall in spending on durable goods. Fixed investment rose strongly, despite a slowdown from the prior quarter (Q2: +1.1% qoq; Q1: +2.8% qoq), likely spurred by healthy construction investment. The construction industry has seen a revival in the first half of 2017, as developers build and refurbish properties to cater to soaring tourism demand. Public consumption dropped 0.1% qoq in Q2, down from Q1’s flat reading. Public consumption continues to be constrained by the government’s efforts to maintain hard-won fiscal credibility and continue paring back the budget deficit, in order to chip away at the towering public debt burden.
On the external front, exports dropped 0.2% qoq in Q2 (Q1: +2.9% qoq), while import growth fell from 1.9% qoq in Q1 to 0.7% qoq in Q2. As a result, the external sector’s net contribution to growth swung from plus 0.4 percentage points in Q1 to minus 0.4 percentage points in Q2.
The economy is likely to keep expanding at a healthy pace going forward. The labor market should continue to recover, albeit at a more moderate pace than observed over the last 12 months, providing a boost to consumers’ purchasing power. External demand will be supported by robust demand among key Eurozone trading partners, while fixed investment growth should remain healthy, particularly in the construction sector. However, the financial system is taking time to heal, with banks still suffering from low capital buffers, weak profitability and a sizeable stock of non-performing loans. In addition, structural bottlenecks, especially concerning the judiciary and regulatory frameworks, continue to hold back the country’s growth potential.
Author: Oliver Reynolds, Economist