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BBVA economist predicts that Portuguese GDP growth will exceed that of Spain in 2025

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The data appears in the presentation “The economic situation and perspectives in Portugal and Spain, and the challenge of long-term aging”, written by Professor Rafael Domenech, Head of Economic Analysis at BBVA Research. An expert says tourism and immigration are growth factors for both countries.

At a conference on: “Financial Literacy, Pensions and Saving for Wellbeing and Growth” which marks the 10th anniversary of the establishment of the BBVA Pensions Institute in Portugal and which was held on Tuesday the 18th of this month at the BBVA Tivoli Theater in Lisbon, a presentation was given on “The economic situation and perspectives in Portugal and Spain, and the challenge of long-term aging,” by Professor Rafael Domenech, Head of Economic Analysis at BBVA Research.

As a short-term forecast for Spain and Portugal, the economist expects Portuguese GDP to rise by 2.2% this year (lower than last year) and for 2025 growth to remain at 2.2%. For Spain, it expects economic growth of 2.5% this year but only 2.1% in 2025. That is, in 2025 Portuguese GDP growth will be higher than the economic growth of the neighboring country.

In Portugal and Spain in 2024, GDP could grow thanks to tourism, migration and other factors.

The economist points out that the risks are “budget adjustment, weak private investment and productivity, filling vacancies, and the implementation of the next generation European Union.”[PRR]and uncertainty regarding economic policy.”[PRR)eincertezaemmatériadepolíticaeconómica”[PRR)eincertezaemmatériadepolíticaeconómica”

“Growth and inflation remain resilient, reducing room for maneuver for central banks to cut interest rates,” highlights Rafael Domenech.

Portugal and Spain have performed differently compared to the rest of the eurozone countries since the beginning of the Russian invasion of Ukraine.

For the countries of the Iberian Peninsula, it is worth highlighting the slowdown in prices, after Europe.

Rafael Domenech says growth above the EU level mitigates the risk premium.

Challenges and uncertainties from 2025 onwards

Regarding Europe's new budget rules, these will require significant and sustained adjustments over time from 2025 onwards.

The economist also talks about increasing financial pressures.

At the level of productivity, the economist points out weak investment. Weak productivity growth; increased restrictions on the labor market; And fill vacancies
Salary development.

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At the economic policy level, political uncertainty emerges, which affects economic policy. But the most obvious challenge is the implementation of the NGEU/PRR.

Rafael Domenech, head of economic analysis at research firm BBVA, also argues that, in contrast to Portugal, “it is estimated that Spain needs an improvement of around 2.5 percentage points of GDP in the basic structural balance to comply with budget rules.” The economist adds that these goals are difficult and could have a negative impact on activity, especially if economic conditions are less favorable than expected and if the amendment aims to increase the tax burden.

The negative impact would be less if inefficient expenditures were eliminated and indirect taxes increased, Dominic highlights.

Challenges of the public pension system in Europe

The main challenge facing the distributional pillar of European public pension systems is the result of two excellent pieces of news, one of which points to the fact that people live longer due to increased life expectancy after achieving it, says Rafael Domenech.
65 years old.

“For example, in Spain, life expectancy from age 65 increases by about 16 months every 10 years, but the average retirement age does so at a rate of 6 months per decade,” The Economist reported.

The other “good” news that explains the pension challenge is the baby boomer generation
They are beginning to retire or will do so in the coming years, and they will do so with an increase in life expectancy, “but without many younger generations replacing them.”

The Spanish economist warns that “the dependency ratio will practically double in the coming decades.”

Following the 2024 Aging Report, the dependency ratio in this view is defined as the ratio of the population aged 65 years and over to the population aged 20 to 64 years.

The dependency ratio or dependency index, or dependency ratio, of the population measures the ratio between the economically dependent population and the economically active population.

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“Although there is a great deal of uncertainty in demographic projections, they all point to a…
“An increase in the dependency ratio of 64% in European countries between 2022 and 2070,” says Rafael Domenech, adding that the increase in Portugal will be 66%, that is, less than in Spain (94%).

The economist explains that European countries show a huge variation in pension spending compared to GDP: from 6.8% in the Netherlands to 15.7% in Greece (2022).

“The dependency ratio explains part of these differences (19%),” he adds, adding that the rest is explained by the other components.

Excluding the effect of the dependency ratio, Spain is one of the countries with the highest spending on pensions as a share of GDP, surpassed only by Austria, France, Italy and Greece.
Portugal is close to the EU average and the Nordic countries are below average, according to an economist at BBVA.

What factors determine retirement expenditures as a percentage of GDP? The coverage ratio (pensions/population aged 65 and over) explains 2% of the differences between EU countries in pension spending and GDP.

“Countries such as Greece, Italy, Portugal and Spain have a coverage rate lower than the EU average, but with much higher spending on pensions as a share of GDP,” the economist highlights.

According to the presentation, the benefit ratio (average pensions relative to GDP per…
factor) explains 35% of the differences between retirement expenditures and GDP.

“The countries with the highest interest rates in Europe are Greece (74.4%), Italy (69.3%) and Spain (64.1%), with a major sustainability challenge. “In Portugal it is 52.9%,” he says.

The economist says that the differences in the benefit ratio reflect heterogeneity in the design of public pension systems and differences in productivity growth.

Another factor that determines pension expenditures as a percentage of GDP is the employment rate (employment among the population aged 20 to 64 years). This is the second most important factor because it explains 38% of the differences in pension spending compared to the worker
gross domestic product.

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“There are differences of more than 20 points in employment rates, from 66% in
Greece to 82% in Sweden. A 13-point increase in Spain's employment rate, to Sweden's level, would reduce pension spending as a share of GDP by approximately 13%.
2 percentage points,” reveals Rafael Domenech.

The economic analysis also includes an increase in pension spending until 2070. Projections indicate that pension spending as a share of GDP will increase in Spain and decrease in Portugal in the coming decades.

“A greater increase in countries that do not have automatic adjustment mechanisms,” says BBVA.

He adds, “The increase resulting from the dependency ratio is partially offset by the decrease in the benefit rate, the coverage rate, and the increase in the employment rate.”

The study talks about measures in favor of the sustainability of public order. One of them is increasing the retirement age. Over the past two decades, European countries have undertaken reforms
Increasing the legal retirement age from 2008 to 2050, and increasing the retirement age until 2050, especially those that link it to average life expectancy.

Denmark plans to raise the legal retirement age to 72 by 2050.

“This may (depending on its design) be one of the most effective measures to ensure sustainability, but the expected increases are, in general, not sufficient, without other measures,” warns BBVA.

The study talks about measures to encourage active life extension. Half of the EU countries use one or more adjustment mechanisms linking primary pensions to life expectancy
or the present value of a lifetime annuity; Linking retirement age to life expectancy.

Pensions are reevaluated based on demographic data or economic variables.

In Spain, the sustainability factor (which adjusted the initial pension according to differences in life expectancy between generations, at a fixed retirement age) was replaced by the MEI (intergenerational equity mechanism), which serves to increase social contributions.

Finally, the BBVA calls for the implementation of structural reforms to increase employment and productivity.

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