The virtual economy prompts growth throughout Portugal.
Portugal continues to struggle with the Covid-19 pandemic’s third wave, which compromised the summer tourist season and reduced expectations of a sharp recovery of GDP, at least in the third quarter. But the country is optimistic about its economic future: Activity is expected to pick up in the longer term, and segments like the digital economy, infrastructure and some manufacturing offer bright spots and attracting investments.
“In the short run, the pandemic and the vaccine rollout will continue to be the main conditional factors,” says Paula Carvalho, chief economist at Banco BPI. “But then, as immunization increases, activity is expected to keep advancing and to reach pre-pandemic levels by mid-2022. We expect growth to reach close to 4% in 2021 and 4.5% in 2022.”
Strong demand, together with accommodative fiscal and monetary policies, are part of the rationale behind such positive expectations, but so is a gradual pick up in investments, she adds.
In 2020, the Portuguese economy contracted by 7.6% in its worst recession since 1936. So far, 2021’s economic performance has been mixed. A buoyant second quarter, at least according to provisional data, followed a weak first quarter. On the other hand, market watchers expect third-quarter growth to be flat or nearly flat. Before the pandemic, tourism contributed approximately 17% to Portugal’s economy. The UK government’s decision to add Portugal to its Amber travel list in June, which requires returning travelers to self-isolate, cost the Portuguese tourism industry the lucrative months of June and July.
Private and public consumption and exports are expected to boost economic growth in the coming months. Meanwhile, Portugal’s ability to attract foreign investment on the rise can offer a growth engine.
According to a study published in June by professional-services company EY, foreign direct investment in Portugal declined 3% in 2020 due to the pandemic, but the country’s attractiveness advanced from 11th to 10th place in Europe. According to the study’s authors, the most attractive target areas are manufacturing, research and development, shared service centers, and the digital economy and technology.
It is the first time Portugal is among the 10 leading countries out of the 30 European countries considered, notes Lisbon-based Miguel Farinha, partner of Strategy and Transactions at EY.
“It indicated a positive perception of the Portuguese economic recovery prospect, as half of the investors interviewed believe that Portugal’s attractiveness will improve over the next three years and 37% of them want to establish or expand operations in the country over the next year,” he says.
Also, 45% of the investors indicate that the digital economy will be one of the main economic drivers in Portugal’s growth in the coming years. “This is also an excellent indicator of the quality of the country’s infrastructure and talent,” says Farinha.
Feedzai, which uses artificial intelligence to detect fraudulent payments, call-center software company Talkdesk, low-code development platform OutSystems and online luxury fashion platform Farfetch were all founded in Portugal. Even if they have moved their headquarters to the US or London, they retain tech presence in Portugal.
Portugal will continue to be a highly competitive location for investment in the digital and technology areas, according to Farinha.
“The key driver for this is the availability of talent with the right skills—Portugal ranks above average in the percentage of Portugal’s ability to attract foreign investment on the rise can offer a growth engine.