Country Report Portugal April 2009

Outlook for 2009-10

• In 2009 Portugal faces the twin challenges of a severe economic recession and a demanding electoral cycle. The government is expected to focus on alleviating the effects of the recession in the lead-up to the general election.
• The Economist Intelligence Unit believes that the Socialist Party (PS) will remain in power, but not renew its absolute majority. The main opposition Social Democratic Party (PSD) is struggling to pose a strong challenge.
• Earlier fiscal consolidation efforts by the government are forecast to be reversed in 2009-10 by a slowing economy. We expect the budget deficit to rise to 4-5% of GDP in 2009 and above 5% of GDP in 2010.
• After zero real GDP growth in 2008, we forecast a contraction of 4.2% in 2009 and a fall of 0.5% in 2010, with growth only resuming from mid-year. This will be driven by declines in external demand and domestic activity.
• Prices are expected to fall in the first half of 2009, and we forecast deflation of 1% for 2009 as a whole, as weak demand and the base effects of low oil prices combine. We expect the rate of inflation to be 0.4% in 2010.
• The large current-account deficit, at 12.1% of GDP in 2008, is expected to shrink to around 8-9% of GDP by 2010.

Monthly review

• The PS government is in dispute with the main opposition PSD over the nomination of the next national ombudsman, with the parties disagreeing about how independent the officeholder should be.
• One of the largest-ever demonstrations took place in Lisbon in March 2009, when 200,000 people marched to oppose government economic policies.
• The European Central Bank (ECB) has continued its monetary loosening with a cut of its main intervention rate to 1.25% in early April. The ECB remains behind other leading central banks in terms of the scale of the loosening.
• The Portuguese government has proposed the establishment of a new credit line that will provide relief to families with unemployed members who are struggling to meet their mortgage repayment requirements.
• The government has approved new rules for personal loans for consumption purposes, including a cap on the interest rate associated with such loans.
• Portugal's foreign trade is declining fast, in line with a global collapse in trade. Exports declined by 11% in the final quarter of 2008, while imports fell by 6.4%. The trade deficit in 2008 as a whole was 23.2bn.
• Financial markets remain strained. In particular, bond yields on Portuguese debt have continued to widen compared with benchmark German bonds.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52