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Overview - The ongoing adjustment process of the Portuguese economy
The Portuguese economy saw a steep fall in output and a substantial rise in unemployment in 2012. This evolution came against an external backdrop marked by a recession in the euro area and a slowdown in world economic growth, and internally, by a continuing contractionary fiscal policy and restrictive monetary and financial conditions, though the latter eased slightly. Over and against the costs stemming from the decline in activity, the adjustment of the Portuguese economy continued, namely in terms of rebalancing the current and capital account, reducing the structural primary deficit and, as a consequence, improving the perception of risk among international investors.
The recent path of the Portuguese economy refl ects a process of correction of macro-economic imbalances and structural problems that have been developing over a long period of time, which the international economic and financial crisis turned impossible to postpone. Various factors contributed to the significant accumulation of macro-economic imbalances in the Portuguese economy. These factors have different natures and unfold over different time horizons but their effects overlap and reinforce each other. In particular, the Portuguese economy presented for some decades a trade deficit that stemmed from fragilities in the production of tradable goods. To this structural fragility added, as from the end of the 1980s, the gradual entrance of Asian and Central and Eastern European countries in international trade, together with the fragmentation of international productive chains, which changes the pattern of worldwide comparative advantages. In this context it is inevitable to substantially restructure sectors and enterprises, which brings short-term costs. The difficulties of reconversion were significantly complicated by structural weaknesses in the Portuguese economy, specifically the low levels of human capital and the inefficient rotation of workers associated with the segmentation of the labour market. Additionally, the participation in the euro brought stable prices along with lower and less volatile interest rates, leading to a substantial increase in internal demand, promoting the reallocation of resources towards the non-tradable sector and deteriorating the external imbalance. The new economic regime required the assumption of different behaviours from the part of economic agents and the creation of appropriate incentives. Only in this way would it be possible to ensure that the higher levels of household consumption, the higher standards in the services provided by general government and the dynamics of investment resulted from structural gains in productivity. These gains would have to be anchored in a significant rise in the openness of the economy so as to ensure the sustainability of debt levels. This, however, did not happen in full, in particular as regards fiscal policy, which was generally pro-cyclical, aggravating the imbalances that existed in the private sector. Moreover, the weak capacity to attract foreign direct investment, the fragilities in the judicial system and the inefficiencies in some administrative procedures all contributed to a sustained decline in the rate of growth of total factor productivity.
The successive imbalances in the public and external accounts and the inherent worsening of public debt levels and of the international investment position substantially increased the exposure of the Portuguese economy to the risks of an adverse external shock. This shock materialised with the international economic and financial crisis, the ensuing increase in risk and uncertainty in international financial markets and the subsequent spread to the sovereign debt crisis in 2010. The imminence of an abrupt halt in the financing to the Portuguese economy forced the adoption of an adjustment programme and the sharp acceleration in the unavoidable process of correcting the macro-economic imbalances and the structural problems.
As things stand, the ongoing adjustment of the Portuguese economy is hampered by the continuing stagnation in the European economic situation. The mitigation of the costs of the adjustment process depends on the improvement of this macro-economic environment, as well as on the European institutional framework, with progress in terms of the construction of a banking union and an economic and monetary union that is stronger and able to generate confidence in economic agents.