… but economists warn it may not last.
Portugal’s economy surged unexpectedly in the first three months of 2022, with the country’s GDP growing 2.6% compared to the last three months of 2021 and 11.9% compared to the first quarter of 2021. However, economists warn this may be a short-lived economic victory, with the true effects of the war in Ukraine due to be felt sooner rather than later.
Presenting the statistics in Parliament last week, Finance Minister Fernando Medina said the economy has grown at an “impressive rate” and has recovered to “pre-pandemic levels”.
“This is an incredible strong message of confidence that workers and companies are sending us,” the minister said, before admitting that Portugal is not immune to the effects of the war.
“There is not a government or budget in the world, even considering the most powerful countries, that can on its own eliminate the effects of the energetic, food and geopolitical shocks we are confronted with,” Medina added.
Growth above EU average
The good news is that Portugal’s economy has shown resistance to the initial impact of the war.
Portugal was the EU economy which grew the most in the first quarter of 2022 – out of the 11 countries that have revealed this data. Only Austria (with 2.5% and 8.7% quarterly and year-on-year increases) and Latvia (+2.1% and +5.6%) came close.
According to the National Statistics Institute (INE), the recovery of tourism and private consumption in Portugal played key roles in the improvement of the economy.
Lifting of pandemic restrictions
Paula Carvalho, an economist from the BPI bank’s Unit of Economic and Financial Studies, believes Portugal “benefitted from the easing of pandemic-related restrictions” at a time when many central European countries were still dealing with high case numbers in winter.
By February, Portugal had already done away with the requirement to self-isolate for those who had come into contact with people who tested positive for Covid-19, as well as with the recommendation for tele-working.
This led Portugal to have a “higher mobility rate” than other countries, which “naturally had an impact” on the country’s economy, Carvalho told Eco newspaper.
The economist also explained that Portugal’s physical distance from the Ukraine war is also believed to have benefited tourism, which in January and February reached levels “very similar to 2019”, she added.
University economy professor Abel Mateus agrees that Portugal’s geographic distance from the conflict may help explain why the country did not feel the effects of the war in the first quarter of 2022. Still, he warns that “Portugal is not an oasis” and that the “indirect effects” will eventually inevitably be felt.
“These will be felt starting in the second and third quarters,” he told Observador newspaper, naming inflation and rising energy prices as some of the most likely consequences of the war.
How much of an impact will be felt will depend on how the conflict develops, the professor predicts, adding that the success of Portugal’s tourism will be “crucial” to attenuate the negative effects of the war.
Economist João Lampreia from BiG bank also helped put the data into perspective, recalling that Portugal was the EU country with the worst economic performance at the start of 2021. In other words, Portugal is now adjusting its “terrible performance” at the time when the country was going through perhaps its most difficult period of the pandemic, he told Eco.
€17.5 billion savings during pandemic
Pedro Braz Teixeira, an economist linked to Portugal’s Forum for Competitiveness (Fórum para a Competitivdade), also provided further insight into the reasons behind Portugal’s economic growth.
According to Teixeira, the savings made by Portuguese people during the pandemic years allowed them to spend more money on things they couldn’t during lockdown – such as holidays.
In fact, the Bank of Portugal had already said that the ‘main weapon’ against inflation should be these additional savings, which its governor Mário Centeno estimated to have reached around €17.5 billion – more than the country’s Recovery and Resilience Plan (PRR), the so-called European ‘bazooka’.
Speaking to Observador, Teixeira added that the government’s measures to mitigate the increase of fuel prices in Portugal may have also contributed to sustain Portugal’s economic recovery.
Portugal’s balance of trade – which saw exports outweighing imports – is also said to have played a role in the country’s positive results.
“This result was in some way already expected, given the dynamism shown by the exports of goods in February and March as well as the improvement of touristic demand,” João Borges de Assunção, head of the Católica-Lisbon Forecasting Lab (NECEP), told Observador.
Meanwhile, BPI bank remains optimistic about its forecasts for 2022, continuing to believe Portugal’s economy will grow 4.2% and that the first signs for the second quarter of the year are positive.
However, the bank is unwilling to match the more optimistic 4.9% growth forecast of the 2022 State Budget as there are “few signs” that the conflict in Ukraine – which it says is an “important disruptive factor of economic growth” – will be resolved soon.
It adds, however, that it may review its forecast if the conflict does not ramp up significantly.