Macro-Financial Environment in Portugal

Portugal’s economic activity picked up in 2017, and the gap between the economicand financial cycle is narrowing. After three years of moderate growth, real GDP accelerated to 2.7 percent in 2017, the highest since 2000, and the output gap is closing. Although the creditcycle continues to trail the cyclical recovery, the gap is narrowing driven by a strong increase in new lending to households for consumption and house purchases, as well as to nonfinancial corporates with good risk profiles. The robust growth in new lending has supported aggregatedemand and thus the economic recovery, but may have also slowed the deleveraging process.

Despite recent progress, financial imbalances remain elevated. While the non financial private sector’s debt-to-GDP ratio fell 47 percentage points since 2012, it is still among the highest in the euro area, with total household and corporate debts standing at 74 and 138 percent of GDP at end-2017 (unconsolidated basis), respectively. For its part, public debt remains elevated at 126 percent of GDP. In the banking sector, the still high stock of non-performing loans (13.3 percent oftotal loans at end-2017) and modest profitability prospects remain concerns. In the housing markets, prices continue to increase (about 20 percent in real terms since 2013 compared to seven percent in the euro area), and there are concerns that the current easy financial conditions could boost mortgages and further drive up prices. In this environment, a sudden repricing of risks could affect financial stability and thus economic growth.