The Portuguese economy had been going through an unprecedented period of economic expansion for two decades. The last crisis had been in 1953 and, since then, the country had seen the highest rate of growth in the real GDP per capita in national history. During this period, the country became industrialised, it was no longer the heavily agricultural economy that it had been until the mid-20th century and it had opened up to international trade. Although it was still one of the poorest and most closed countries in Western Europe in 1973, Portugal was moving closer to the other nations in both of those indicators.

The Portuguese colonies represented 15% of exports and 10% of imports from and to the Portuguese metropole in 1973. The wars of independence in Angola, Guinea-Bissau and Mozambique dragged on. When the war ended in 1974, the Portuguese contingent deployed was in excess of 170,000 troops. The military expenses associated with the conflict represented 10% of the GDP in 1969. At the time, there was continuous international pressure to put an end to one of the last European colonial empires.

The 1960s and the early 1970s were marked by emigration to some of the most developed economies in Western Europe. Partly, because the opening up of the economy allowed it, to escape the war and flee too from the repression and lack of individual and political freedoms. This was the country that would begin going through major transformations after 1973, which would be reflected in a long economic recession until 1978.

The recession was the result of three different, successive crises that were consecutive and overlapping: the effects of the increase in oil prices and the world recession, which cut emigration and remittances from emigrants; the Revolution of 25 April 1974 and the transition to democracy, directly leading to political instability and the disruption of economic activity; and finally, the accumulation of external imbalances which culminated in the balance of payments crisis in 1977 and recourse to IMF aid in 1977-78.

Should this recession, which lasted five years, be divided into two or even three different recessions? There are arguments for and against this option. However, based on its analysis, the committee concluded that it is most appropriate to take it as a single recession. The three phases partially coincided, so the economy never reached a trough followed by a period of expansion of at least one year, which would make it possible to decree the end of the previous recession.

Index, GDP per capita according to various population series

The decolonization process that followed the 1974 Revolution led to the arrival of a significant portion of the population living in the then colonies, mainly in Angola and Mozambique, to Portugal. Between 1974 and 1976 the increase in population is notorious.

In October 1973, the Organisation of the Petroleum Exporting Countries (OPEC) restricted oil supplies to the western world. Because it had allowed the Lajes base to be used during the Yom Kippur War, Portugal was one of the countries directly affected.

Oil was the source of three quarters of the country’s primary energy, so the embargo caused runs on and long queues at petrol stations.

The world economy went into recession almost immediately, suffering the impact of the increase in energy prices, but also of an increase in the price of other raw materials due to the El Niño phenomenon, which affected world production.

Portugal suffered from a slowdown in exports as well as a decline in the terms of trade.

The reaction of national macroeconomic policies was passive or even procyclical, thus amplifying the effects of the crisis.

As for the monetary policy, there was an increase in interest rates in late 1973, with the aim of curbing the inflation that had come with an expansion in credit and in the money supply, as well as a stock exchange boom that year. The fiscal policy did not respond to the oil crisis; financing the war expenditure on the different fronts in the Colonial War came at the cost of a slowdown in public investment and the issue of domestic public debt. The government had not made any changes to taxes in years and the comfortable volume of foreign exchange reserves made it possible, despite the impact of the oil crisis, to avoid the risk of a balance of payment crisis initially.

The April 1974 Revolution brought with it huge changes in the public, social and economic structures of the country.

Between April 1974 and February 1975, apart from the political and economic instability and uncertainty, there was also a sharp increase in public spending. In 1974, 80,000 new civil servants were hired, mainly coming from the ex-colonies. The increase in spending on civil service salaries put pressure on the public accounts and the high public deficits were monetised, leading to inflation shooting up to 37% in 1974.

In the private sector, the state intervened in several companies that were in difficulties, appointing boards and granting public credit. In May 1974, a national minimum wage was instituted and, by the end of the year, several social welfare payments had been introduced and dismissals were made more difficult. The government increased the nominal minimum wage by 20% in 1975, while at the same time imposing administrative price control, thus leading to a sudden decline in company profits. In response to the capital flight from the country, a limit was imposed on cash withdrawals and the escudo stopped being freely convertible abroad in May 1975.

In a second phase, from March to November 1975 (known as the Hot Summer), economic uncertainty grew. Almost all banks and insurance companies were nationalised, sectors that represented 10% of the Portuguese GDP. In industry, factories and other companies were nationalised, at a magnitude estimated to have put between 15% and 24% of the GDP into the state business sector in 1978. Finally, more than a million hectares of land were occupied by farm labourers and locals, mainly in the south of the country. The land was converted into collective farms, although much of it was returned to private ownership in 1976 after production collapses.

In addition to the political and monetary instability, this period was also marked by a demographic crisis. Emigration, which had been a constant in the previous decade, suddenly stopped. In 1974 and 1975, troops and civilians from the ex-colonies returned to Portugal following the decolonisation process. The integration of all of these people into the production sector was not easy, particularly because of the instability in the business sector.

Unemployment rate

The rapid increase in the resident active population was not accommodated by the labor market, at a time of strong political and social instability. Unemployment skyrocketed.

Between November 1975 and July 1976, there was clarification of the political regime in the country and a move towards the consolidation of democracy. The first general election was held in April 1976. The process of reversing the indirect nationalisations was put in place by the end of the year and a public investment plan was presented. These changes reinforced budget deficits, partially funded by the central bank.

The fiscal and monetary expansionism from 1973 to 1976 put enormous pressure on Portugal’s balance of payments, exhausting foreign reserves. At the same time, political instability put a stop to external financing.

After receiving lines of credit from the European Investment Bank and the American treasury in 1976, which proved to be insufficient, the country turned to the IMF for a bailout of USD 750 million, loaned by a group of western countries, in April 1977. The programme led Portugal to adopt drastic austerity measures between 1977 and 1978, including quantitative limits on credit, but also to the devaluation of the escudo to restore competitiveness.

Prices go up and currency loses value

Inflation and Exchange Rate