Banco de Portugal estimates GDP drop between 3.7pct, 5.7pct in 2020

Portugal’s central bank Bank of Portugal has estimated that the Portuguese Gross Domestic Product will fall 3.7% in a baseline scenario and 5.7% in an adverse scenario in 2020, due to the Covid-19 pandemic, according to the Economic Bulletin released on Thursday.

“In the baseline scenario, a reduction of 3.7% of real GDP in 2020 is estimated. The economic impact of the pandemic is assumed to be relatively limited, which is partly due to the assumption that the measures adopted by the economic authorities are successful in containing the damage to the economy,” according to the statement.

Already in the adverse scenario, “the economic impact of the pandemic is assumed to be more significant due to the longer paralysis of economic activity in several countries, leading to greater capital destruction and loss of employment. This scenario also considers greater uncertainty and more significant levels of turbulence in the financial markets, with the recession being 5.7% of GDP.

In the baseline scenario, the Bank of Portugal sees the economy growing 0.7% in 2021 and 3.1% in 2022, but in the adverse scenario, the increase in growth is projected at 1.4% in 2021 and 3.4% in 2022.

According to the Bank of Portugal, the Portuguese economy registers a sharp contraction of activity in the second quarter and recovers only gradually from the end of the year.

“Nevertheless, this scenario assumes a relatively limited disruption in financial markets and a stimulus provided by monetary and fiscal policy decisions,” the BdP said.

The central bank economists also estimate that private consumption will fall by 2.8% in 2020, after an increase of 2.3% in 2019.

“There should be a sharp drop in spending on durable goods and a reduction in current consumption. The evolution of consumption reflects, on the one hand, an increase in precautionary savings by households in a context of great uncertainty and, on the other hand, a slight fall in real disposable income,” it said.

Public consumption, on the other hand, in the baseline scenario, is expected to increase 2.1% in 2020, which represents a marked acceleration compared to 2019 (0.8%), and stems from the assumption of a significant increase in health expenditure borne by the public administrations, assuming that part of the population affected by the disease will need adequate medical monitoring and medication and, in the most serious cases, hospitalisation.

In the baseline scenario, investment (gross fixed capital formation) will fall 10.8% in 2020, after a growth of 6.4% in 2019, a change that has underlying a strong fall in business investment and, to a lesser extent, in residential investment.

“Corporate capital expenditure is expected to be strongly conditioned by the high uncertainty regarding the magnitude and duration of the outbreak and its impact on domestic and external demand prospects,” according to the baseline scenario predicted in the BdP Economic Bulletin, which foresees a recovery of investment in the following years, growing 2.9% in 2021 and 7.9% in 2022.

The baseline scenario also foresees a fall in exports of 12.9% this year, as well as 11.9% in imports.

In the following years, according to the baseline scenario, exports should grow by 4.2% and 5.5% in 2021 and 2022, respectively, and imports recover around 6%.

Inflation is expected to remain at very low levels in 2020, in the baseline scenario projected by the BdP, staying at 0.2%, after 0.3% in 2019.

In the adverse scenario, private consumption decreases by 4.8% in 2020, investment 15%, exports decrease by 19%, as do imports.