Portugal's Economic Recovery Looks Real, But So Do the Warning Signs of Another Crisis

Last week, I went on a lovely trip to Portugal. I went cycling and surfing. I tried the extreme sport of coasteering for the first time. I got to try pastel de nata, bacalhau, and frango piri-piri. Being there for a week, I got notice the way things work, from public transportation and work ethic to housing and health care. 

Then you learn things like Portugal needed a €78 billion bailout during the eurozone crisis last decade. In response, Portugal was able to reduce its deficit spending and close the gap on its bond spreads with fiscal restraint. The Organization of Economic Co-operation and Development (OECD) recently called Portugal's fiscal performance "among the strongest in the OECD and the Euro Area in the past few years." Continued debt reduction, disciplined budgets, strong nominal GDP growth all help explain why both Fitch's and Standard & Poor's have a positive outlook for Portugal. 

These are certainly reasons to be hopeful. Yet there are some concerns about the Portuguese economy:

• Portugal has a birth rate of 1.4, which is well below the replacement rate of 2.1. 
• Portugal is the third country in Europe with the lowest proportion of young people, which makes it more difficult to pay for social programs and to keep the economy growing with a stable labor force. 
• A study from the University of Lisbon reminds us that brain drain is compounding these effects. Up to 40 percent of Portugal's graduates emigrate to other countries.
• A recent report from the European Commission found that Portugal has the most overvalued housing prices, which makes it that much more difficult for everyday Portuguese citizens to afford housing.
• If the conflict in the Middle East is prolonged, it could weaken economic growth and exacerbate inflation for Portugal. 

Portugal does not fit neatly into an optimistic or pessimistic narrative. On the one hand, Portugal has made impressive fiscal strides since requiring a bailout just over a decade ago. Compared to some larger European economies, Portugal's fiscal trajectory actually looks relatively disciplined. 

On the other hand, strong tourism, balanced budgets, and improved credit ratings do not solve deeper structural problems. Low birth rates, emigration of educated workers, and housing affordability issues could create significant economic pressures in the years ahead. Portugal seems to have escaped one crisis while gradually wading into another one.