EconPol Europe: Recession in Portugal Could Cause Budget Deficit of up to 4% of GDP, Portuguese Government Must Step in to Cover ‘Significant’ Cut in Household Spending

An EconPol Europe report estimating the real growth rate of GDP in Portugal in 2020 predicts a budget deficit of around 3% or 4% of GDP, implying a break and not a fiscal regime switch.

Of particular relevance, says author António Afonso (EconPol Europe, Lisbon School of Economics and Management of the Universidade de Lisboa) is private consumption and investment, with households cutting spending significantly and an increase in government spending necessary to cover the lack of domestic demand.

“An increase in budgetary imbalances is inescapable,” says Professor Afonso. “Taking into account that a recession is building up, both in the world and particularly in the case of the main trading partners of Portugal, it is rather foreseeable that a decline in real growth will necessarily take place in 2020.”

The report examines three possible scenarios: pessimistic, baseline and optimistic, with a range for real growth between -5.8% and -3.9%.

“It is important to bear in mind that in the aftermath of the 2008-2009 global and financial crisis, households reacted differently from the initial expectation in Portugal,” continues Professor Afonso. “Along with other euro area countries, consumers reduced consumption and increased saving in spite of a decrease in disposable income. In fact, the private savings as a percentage of GDP stood at around 18.8% in 2012, while the initial forecasts pointed to 12.8%.

“It’s therefore quite probable that an even more substantial retrenchment of private consumption will occur this time, given the uncertainty is both more fundamental and incisive.”