Imports G&S in Portugal

Portugal - Imports Goods and Services

Economy records sharpest contraction since Q2 2020 in Q1

According to a preliminary reading, GDP dropped 3.3% on a seasonally-adjusted quarter-on-quarter basis in the first quarter, contrasting the 0.2% expansion seen in the fourth quarter of last year and marking the sharpest downturn since Q2 2020. On an annual basis, GDP fell 5.4% in Q1, following the previous quarter's 6.1% contraction.

Although a breakdown is not yet available, the quarterly release reflected a deterioration in domestic demand, as the country went through a harsh lockdown that lasted from mid-January until April. Moreover, the external sector also played its part in the decline, as the tourism sector languished.

Moving forward, activity should have remained muted at the outset of Q2. That said, a significant easing of restrictions, culminating in the lifting of the state of emergency at the end of April, should support a strong recovery in the remainder of the quarter, which will likely be driven by robust domestic demand. Moreover, the labor market performed well in Q1, with the unemployment rate falling, boding well for private spending ahead.

On the outlook for the vital tourism sector, Maddalena Martini, economist at Oxford Economics, said:

“Tourism, a key sector for the Portuguese economy, posted its worst result in decades, with the traveler numbers in 2020 down more than 60% from a year before. Although international travel restrictions are still in place, we believe activity in the sector will rebound in H2, boosted by successful vaccine rollouts and a pick-up in mobility.”

On fiscal support, she added:

“The government has extended measures to support the economy, including additional spending for the national health system, financial support for temporarily furloughed employees, state-backed credit guarantees for small and midsize enterprises, and a deferral of social security payments. Together with the funds coming from the Next Generation EU and the Multiannual Financial Framework, these measures will help cover economic losses and support Portugal’s recovery.”

FocusEconomics Consensus Forecast panelists see GDP climbing 4.0% in 2021, which is down 0.2 percentage points from last month’s forecast. In 2022, the economy is seen growing 4.3%.