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Economic and budgetary outlook

The Portuguese Public Finance Council (CFP) economic outlook projects a recovery in the real GDP growth of the Portuguese economy to 3.3% in 2021 and to 4.9% in 2022 under a no-policy change assumption (in 2020 there was a contraction of 7.6%). The recovery is mainly driven by private consumption (+2.7% in 2021 and +6.0% in 2022) and by the exports (+8.9% in 2021 and +11.3% in 2022).


In this scenario, the Portuguese economy recovers to the pre-pandemic 2019 level of real GDP in 2022. In the medium term, in the absence of additional policy measures, the economic activity growth should converge to potential GDP growth (1.7%).

Regarding the labour market, the unemployment rate is expected to increase to 8.3% of the labour force in 2021 (6.8% in 2020), followed by a decrease to 7.3% in 2022 and starting a downward trend towards 6.5% in the medium term. 


Inflation is expected to increase to 0.8% in 2021 (-0.1% in 2020), followed by a contained acceleration to 1.7% in the medium term. 


The fiscal outlook points to a sustained budget imbalance reduction throughout the projection horizon. Pandemic crisis response measures were extended following a  new general lockdown at the start of this year. Their impact of  1.1% of GDP is reflected in an anticipated deficit of 4.1% of GDP. The deficit is projected to fall to 2.1% of GDP in 2022, mainly due to the reversal of all fiscal policy measures in response to COVID-19 adopted in the previous year and to favourable economic developments. A budget deficit reduction from 1.8% of GDP in 2023 to 1.5% of GDP in 2025 is foreseen.


The public debt ratio is expected to resume a downward trajectory in 2021, decreasing 2.1 p.p. of GDP to 131.5% of GDP. Despite this projected downward trend over the projected horizon in 2025 the debt ratio will still be slightly higher than in the pre-pandemic period (117.1%, compared to 116.8% of GDP in 2019). 


The CFP Outlook holds macroeconomic and fiscal risks which are hard to quantify and are mainly on the downside:

  • In the event of a slower than expected vaccination process, or the emergence of new variants of the virus, the expected economic and budget balance recovery may be delayed; 
  • The upward risk of business bankruptcies, and consequently, an unemployment increase and a households income reduction, associated with high economy indebtedness, increases the risk of potential rise in nonperforming loans, especially after the end of the bank moratoria, with an impact on the economy liquidity conditions;
  • The high indebtedness level of firms, households and public administrations poses a significant downward risk in the maintenance of favourable financing conditions over the projection horizon;
  • The possible call of some State guarantees granted under some pandemic response measures;
  • The full use of the 3890 M€ provided for in the Novo Banco Contingent Capitalization Agreement; 
  • TAP State support being higher than accounted for in the 2021 national accounts budget balance (€500 M), as well as the risk inherent in further TAP public interventions in the coming years; 
  • The potential impact of measures to support other public sector entities, in particular in the transport sector, the most affected by the pandemic; 
  • The concretization of budgetary pressures on primary current expenditure, with an impact on social benefits (effect on pension expenditures resulting from an ageing population), expenditures with public servants (progressions and promotions) and intermediate consumption (related to the private partners claims in the context of PPP projects); 
  • The Treasury Bonds interest rates evolution in the coming years and the possible use of repayable loans under the national Recovery and Resilience Plan, which would lead to a public debt increase.


The main upside risk to the macroeconomic scenario in the medium term results from the NextGenerationEU instrument, in particular its centrepiece – the Recovery and Resilience Facility – to help repair the economic and social damage brought by the coronavirus pandemic. At the closing date of this report, its national programme is under negotiation with the European Commission and its final version has not yet been submitted to the Council of the EU approval.


According to this CFP projection, the underlying budgetary dynamics provide a good starting point for Portugal to outline a credible medium-term fiscal strategy to exit the public health crisis, aiming to achieve a prudent fiscal position to maintain the high public debt sustainability conditions. This strategy should also ensure and be based on an improvement in the quality of public finances, to which the implementation of fiscal structural reforms that have long been legislated – but so far not fully implemented – much can contribute. The CFP refers in particular to an effective programme budgeting, a binding medium-term budgetary framework and the completion of public accounting reform: critical aspects of the 2015 Budgetary Framework Law and related legislation still to be fulfilled.

Date of last update: 31/03/2021

Economic and fiscal outlook . Report nº 2/2021 . 31 March 2021