Jan 9 2018

Portugal: Euro Zone’s brightening socio-economic outlook

portuguese prime ministerIn the present post, Lucas Juan Manuel Alonso Alonso analyses some of the more important points contained in the OECD’s 2017 Economic Survey of Portugal. It offers an analysis of the socio-economic position of Portugal once the austerity measures are abandoned, highlighting notable improvement in social and salary, employment/unemployment and fiscal deficit, actions to improve adequate capitalization of banks, and NPLs (Non-Performing Loans) comparative with the situation of other Member States.

In 2016, according to the OECD Economic Survey, Portugal’s labour costs account for 19% of the costs of Portuguese companies, and according to EUROSTAT the average hourly labour cost in Portugal is € 13.7 an hour, while EU average labour costs vary from €50.2 an hour in Norway to € 4.4 an hour in Bulgaria. According to OECD the unit labour costs per hour worked/per employed in Portugal were 2.08% and 2.18%, respectively, higher than in 2015. But, Portugal’s unit labour cost relative to the euro area declined by 1.5% between 2012 and 2015, signalling an improving in the economy’s external competitiveness. According to OECD the labour compensation per hour worked in Portugal was up 2.59% over the previous year 2015. In 2016, of the total of 23 EU countries accounted for in the OECD’s figures, only Greece

has an hourly labour compensation lower than the index (2010=100). Clearly, from a social point of view, between the periods 2015-2016, the relationship among both hours worked and employment quality are better balanced.

In 2016, the OECD labour productivity indicate that Portugal is among the countries in the EU—including Greece, Hungary, Latvia, Lithuania, and Poland—with lower labour productivity per hour worked (GDP per hour worked) of $32.42. And, according to OECD the labour productivity growth in Portugal experienced an annual growth rate of 0.5%, an identical figure to that of Denmark, and Sweden. Obviously, a similar percentage growth in labour productivity does not mean similar amount of labour productivity but is indicative of economic performance. Thus, labour productivity per hour worked in Denmark and Sweden is respectively $63.64, and $56.42, significantly higher than the $32.42 of Portugal. Between 2010 and 2016, Portugal’s average annual growth of labour productivity per hour worked was around 0.5216.

According to OECD the average annual wage in Portugal is $24,529, while Greece and Poland, with lower labour productivity per hour worked $30.89 and $29.1 respectively, have higher average annual wages at $25,124.0 and $25,921.0 respectively. Portugal’s average hourly labour cost is €13.7, while in Poland average hourly labour cost is lower than Portugal at €8.6, in Greece it is higher at €14.2. Estonia, Latvia, Lithuania and Hungary also have lower average hourly labour costs—between €7.3 and €10.9—than Portugal, but also lower labour productivity per hour worked, between $26.44 and $31.1, and average annual wages between $21,711.0 and $23,621.0. Portugal’s higher labour cost thus appears to be justified by higher productivity, while countries with lower labour productivity have similar or even higher wages than Portugal. Only the Czech Republic and Slovakia offer more competitive framework conditions, with labour productivity per hour worked $34.69 and $39.1, and average hourly labour cost €10.2 and €10.4, respectively. Nevertheless, more must be done in European to avoid a race-to-the-bottom in terms of labour costs.

According to the OECD Economic Survey, the administrative extensions of collective bargaining agreements to firms not involved in the bargaining process, have lead to increased separation rates while hiring rates have been reduced. This is clearly not a positive development, but I believe that labour rights must be respected and competitiveness cannot systematically use wage reductions, it must be based on innovation and differentiation of product/service. Portugal’s National Reform program contains significant social measures, such as reduce the number of school dropouts and of NEETs (those not in education, employment or training) and adult education and training.

The Portuguese government reported a €3.7 billion budget deficit in 2016, equivalent to 2.1% of the GDP—it’s falling from a high peak of 11.2% of GDP in 2010—, the lowest in 40 years. For 2017, the government expects the deficit to fall further to 1.6 % of the GDP. The narrowing is mainly due to higher social security receipts—maintaining the

Portugal’s former Prime Minister Pedro Passos Coelho addresses a news conference in Berlin July 3, 2013. REUTERS/Tobias Schwarz

social security rate constant at 34.75% (11% for employees and 23.75% for companies)—and lower capital outlays. It is important to note that in 2012, the Prime Minister Passos Coelho proposed to cut employers’ social-security contributions by 5.75 points, reducing this rate to 18%, while increasing employees’ social-security from 11% to 18%. This austerity measure was not carried out because it was considered totally unfair (The Economist: Portugal’s austerity measures).

For the years 2014, 2015 and 2016, combined with an increasing GDP growth, both general government revenue and expenditure to GDP have been decreasing, general government revenue 44.6%, 43.8%, 43.1% respectively, and general government spending 51.8%, 48.3%, and 45.1% respectively. Therefore, there was a policy of a gradual reduction of the budget deficit based on a reduction of both the government revenue and the expenditure ratios. But, since on these years, the total value of GDP has been growing 299616, 308031, and 316603 millions of US$ respectively, the general government revenue has increased in absolute terms, while there was a cut on the country’s public spending since general government spending has decreased in absolute terms 155201, 148778, and 142787 millions of US$ respectively.

In 2016, according to OECD the GDP per capita at current price and PPP (Purchasing Power Parity) in Portugal is an estimated value of $30,662.3, increasing by 16% from 2012 to 2016. The GDP measured in million US$ at current price and PPP is an estimated value of 316,603.1, experiencing an average annual growth rate of 3.29% between 2012 and 2016, up 2.5% year-on-year in the third quarter of 2017. At present, as mention in the OECD Economic Survey, Portugal’s exports have increased significantly, 40% of GDP, up from 27% in 2005, and its emissions of greenhouse gases (GHG) per unit of GDP are well below the OECD average. Therefore, Portugal’s economy is growing at a healthy rate and combined with expanding exports.

In Portugal, the Personal Income Tax Rate is a progressive tax ranging from 14.5% (for income under € 7,000) to 48% (for income over € 80,000). In addition, there is a surtax of 3.5% for all income over € 7,070 (current minimum wage), and a solidarity tax of 2.5% which is charged on income over € 80,000, and 5% in income over € 250,000.  Solidarity and surtaxes take the top rate of tax to 56.5%. This solidarity policy, in my view needed, places Portugal among the top 5 countries in the world with higher personal income taxes. 2016 is the last year that these surtaxes will be applied but solidarity taxes will continue to apply. In the business field it has been able to encourage investments since corporate tax rate has fallen from 23% in 2014, to a record low of 21% in 2016.

Based on the Trading Economics indicators for Portugal, it is possible to perform the following analysis. Full time employment has increased by 15.28%, from a record low of 3,725,700 people in 2013 to 4,295,000 in the third quarter of 2017. Part-time employment was reduced by 25.17%, from a maximum of 678,900 people in 2012 to 508,000 in the third quarter of 2017. The number of employed persons has increased by 3.4%, from 4,557,800 people in January to 4,712,800 in October of 2017. The unemployment rate, which had reached a peak of 17.5% in 2013, stands at 8.5% (441,500 people) in the third part of 2017, declined from around 10.5% (533,100 people) in the first part of the year, and youth unemployment rate is reduced by 15.1%, from a peak of 40.70% in February of 2013 to 25.6% in October of 2017. A living wage family—“allegedly” minimum income necessary for a family to meet basic needs—increased by 4.20% from 835.0 €/month in 2016 to 870.0 in 2017.

Employment rate, which reached a record low of 48.80% in the first part of 2013, increased to 54.30% in the third quarter of 2017, and labour force participation stands at 59.3%. As the labour force participation rate, is the number of persons who are employed and unemployed but looking for a job divided by the total working age population, we may deduce that, in the third quarter of 2017, the working age population is around 8,691,905 people (4,712,800+441,500)/0.593—working age population is defined as those people aged 15 to 64, and the proportion of the working age population aged 15 to 64 is a basic indicator for employment rate, as showed above 54.30% (4,712,800/8,691,905)*100.

The gross minimum wages increased by 15% over the period 2012-2017, from 565.83 €/month in 2012 to 649.83 €/month in 2017. The high-skilled wages have gone up by 3.03%, from 1,320.00 €/month in 2016 to 1,360.00 €/month in 2017. The low-skilled wages decreased by 4.5% to 615.00 €/month in 2017 from 644 €/month in 2016.

Portugal’s unit labour costs performance related to the euro area have declined by 1.5% between 2012 and 2015, improving the country’s external competitiveness. At the same time, both unit labour costs per hour worked and per employed have increased by 2.08% and 2.18% respectively, over the previous year 2015. Labour compensation per hour worked has increased by 2.59% from 2015 to 2016, which means that both hours and employment quality are better balanced from a social point of view, and that living standards are rising. There is not a solid base to claim that Portugal is less competitive in terms of wages, labour productivity, hours worked, and labour cost than other EU countries with similar socio-economic characteristics.

In 2016, Portugal’s budget deficit is €3.7 billion, 2.1% of the GDP, the lowest in 40 years. For 2017, the budget deficit is expected to be reduced to 1.6 percent of the GDP. For the years 2014, 2015 and 2016, Portugal’s government revenue has increased in absolute terms, while the country’s public spending declined in absolute terms. Between 2012 and 2016, GDP at current price and PPP has been growing at an average 3.29% annual rate, while per capita GDP rose by about 16%. Portugal’s exports have increased significantly, 40% of GDP, up from 27% in 2005.

With regard to taxes, the Portugal income tax rate is a progressive tax ranging from 14.5% (for income under € 7,000) to 48% (for income over € 80,000). In order to help in recovery from the crisis Portugal established a fair and redistributive tax through a solidarity tax of 2.5% which is charged on income over € 80,000, and 5% in income over € 250,000. Additionally, corporate tax rate has fallen from 23% in 2014, to a record low of 21% in 2016.

The number of employed persons has increased by 3.4%, from 4,557,800 people in January of 2017 to 4,712,800 in October of 2017. Full time employment has increased to 4,295,000 people in the third quarter of 2017. Part-time employment was reduced to 508,000 people in 2017 from a maximum of 678,900 in 2012. The unemployment rate, which had reached a peak of 17.5% in 2013, stands at 8.5% (441,500 people) in the third part of 2017. Employment rate, which has reached a record low of 48.80% in 2013, increased to 54.30% in the third quarter of 2017 with a working age population of around 8,691,905 people, and labour force participation rate stands at 59.3%.

With regard to wages and salaries data, the gross minimum wages increased by 15% over the period 2012-2017, from 565.83 €/month in 2012 to 649.83 €/month in 2017. The high-skilled wages have gone up by 3.03%, from 1,320.00 €/month in 2016 to 1,360.00 €/month in 2017. The low-skilled wages decreased by 4.71% to 615.00 €/month in 2017 from 644 €/month in 2016. A living wage family increased by 4.20% from 835.0 €/month in 2016 to 870.0 in 2017.

Note: This article gives the views of the author, and not the position of the Euro Crisis in the Press blog nor of the London School of Economics.


Lucas Juan Manuel Alonso Alonso is a Global Economist, with an Executive MBA in Innovation & Management, and an International Commerce Degree. He is a writer/contributor to several international media, educational and research activities, think-tanks, and international associations. Within the field of international market analysis, and in order to evaluate investments, he developed econometric models and he wrote research papers about capital real options, ARCH & GARCH processes and Brownian motion.He is currently carrying out research and publishing articles on, among others, global economy, countries’ structural and socio-economic conditions, emerging and advanced economies, GDP and progress, wealth distribution, public debt, aggregate demand, macroeconomic performance, triggers to internationalization. He tweets at @globalonsolucas


Related articles on LSE Euro Crisis in the Press:

How Portugal’s leaders exploited the bail out to pass measures they already supported

Greece: any better times or more pitfalls ahead?

Socio-Economic reflections on the Euro Zone

 

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One Response to Portugal: Euro Zone’s brightening socio-economic outlook

  1. Author says:

    Conclusions:

    Portugal’s unit labour costs performance related to the euro area have declined by 1.5% between 2012 and 2015, improving the country’s external competitiveness. At the same time, both unit labour costs per hour worked and per employed have increased by 2.08% and 2.18% respectively, over the previous year 2015. Labour compensation per hour worked has increased by 2.59% from 2015 to 2016, which means that both hours and employment quality are better balanced from a social point of view, and that living standards are rising. There is not a solid base to claim that Portugal is less competitive in terms of wages, labour productivity, hours worked, and labour cost than other EU countries with similar socio-economic characteristics.

    In 2016, Portugal’s budget deficit is €3.7 billion, 2.1% of the GDP, the lowest in 40 years. For 2017, the budget deficit is expected to be reduced to 1.6 percent of the GDP. For the years 2014, 2015 and 2016, Portugal’s government revenue has increased in absolute terms, while the country’s public spending declined in absolute terms. Between 2012 and 2016, GDP at current price and PPP has been growing at an average 3.29% annual rate, while per capita GDP rose by about 16%. Portugal’s exports have increased significantly, 40% of GDP, up from 27% in 2005.

    With regard to taxes, the Portugal income tax rate is a progressive tax ranging from 14.5% (for income under € 7,000) to 48% (for income over € 80,000). In order to help in recovery from the crisis Portugal established a fair and redistributive tax through a solidarity tax of 2.5% which is charged on income over € 80,000, and 5% in income over € 250,000. Additionally, corporate tax rate has fallen from 23% in 2014, to a record low of 21% in 2016.

    The number of employed persons has increased by 3.4%, from 4,557,800 people in January of 2017 to 4,712,800 in October of 2017. Full time employment has increased to 4,295,000 people in the third quarter of 2017. Part-time employment was reduced to 508,000 people in 2017 from a maximum of 678,900 in 2012. The unemployment rate, which had reached a peak of 17.5% in 2013, stands at 8.5% (441,500 people) in the third part of 2017. Employment rate, which has reached a record low of 48.80% in 2013, increased to 54.30% in the third quarter of 2017 with a working age population of around 8,691,905 people, and labour force participation rate stands at 59.3%.

    With regard to wages and salaries data, the gross minimum wages increased by 15% over the period 2012-2017, from 565.83 €/month in 2012 to 649.83 €/month in 2017. The high-skilled wages have gone up by 3.03%, from 1,320.00 €/month in 2016 to 1,360.00 €/month in 2017. The low-skilled wages decreased by 4.71% to 615.00 €/month in 2017 from 644 €/month in 2016. A living wage family increased by 4.20% from 835.0 €/month in 2016 to 870.0 in 2017.

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