After seven years of consecutive growth and a general reduction in risk across institutional sectors, official estimates point to a drop in activity of 7.6% in Portugal in 2020, i.e. above the 6.8% contraction in the euro area, mainly reflecting greater exposure to tourism.
The suspension of a number of activities, the partial or total closure of firms and the closure of borders led to supply disruptions. The drop in external demand, especially tourism and, to a lesser extent, private consumption, was a particularly important factor behind the contraction in demand.
Developments in activity had a very strong intra-annual profile. This drop was observed during the first lockdown. In contrast, the easing of restrictions allowed for a swift recovery of activity.
Continued favourable financing conditions and support measures for households and firms, in particular subsidies to firms and the deferral of tax obligations, mitigated the impact of the pandemic shock. The monetary policy decisions of the European Central Bank helped maintain favourable financing conditions for Portuguese banks and their transmission to the economy.
State-guaranteed credit lines and the moratorium regime enabled firms to meet their liquidity needs. Lending to the economy grew and the indebtedness ratio of the private sector increased, but the credit moratoria reduced debt service.
General government interest expenditure declined for the sixth year in a row. The public debt ratio increased by 16.8 p.p. to 133.6% of gross domestic product (GDP), reflecting a budgetary deficit of 5.7% of GDP, an accumulation of deposits of 4.6% of GDP and a 7.6% contraction in GDP. The increase in public debt in Portugal was higher than in the euro area.
Household disposable income increased by 1%, with similar contributions from compensation and from social benefits and other current transfers. The household saving rate reached 12.8% of disposable income, its highest level since 2002.
The impact of the pandemic differed significantly across sectors, but employment safeguards helped contain the decline in employment at 2%. The unemployment rate increased by only 0.3 p.p. to 6.8%.
The pandemic context was also marked by a drop in prices. The inflation rate declined to -0.1% (0.3% in 2019), mostly reflecting developments in energy and services prices. Only food prices increased sharply by 1.8%.
The Portuguese economy's net lending declined. These developments were mixed across account components. The combined current and capital account balance stood at 0.1% of GDP (1.2% in 2019). The current account turned into a deficit of 1.2% of GDP, in contrast to an average surplus of 0.5% in 2018 and 2019. In turn, the capital account balance increased to 1.3% of GDP, owing to inflows of European Union funds.