The recovery is projected to strengthen in 2015 on the back of strong external demand, a weaker euro and lower oil prices. After having contracted for three years, domestic demand has started to rise, and business investment is projected to pick up further in 2016. However, considerable economic slack will remain, as the unemployment rate will continue to fall only moderately.
As the recovery remains fragile, the more moderate pace of fiscal consolidation is welcome. Further tax reforms, such as an additional, revenue-neutral, reduction in the effective corporate tax rate could strengthen business investment. Further reductions of the high unemployment rate would help to reduce income inequality. Despite progress, the competitiveness of the tradable sectors is held back by weak competition in upstream services sectors, which could be addressed through further structural reforms in the electricity and gas sectors and curbing unnecessary restrictions in professional services. Notwithstanding some progress in deleveraging, reducing still high private sector indebtedness, including through an assessment of the performance of new insolvency procedures, remains a priority for raising bank credit and investment.
Investment fell by nearly 35% between 2007 and 2014, more than twice the decline in the European Union as a whole. Business investment has started to increase again, driven by stronger prospects for internal and external demand, higher capacity utilisation and the need to renew depleted capital stock. Still, the pick-up in investment observed in key euro area economies has yet to materialise in Portugal. Public and residential investment will continue to stay subdued, reflecting fiscal consolidation needs and high leverage ratios of households and firms in the construction sector.