Country Report Portugal December 2008

Outlook for 2009-10

• The Socialist Party (PS) government is increasingly looking to the general election, expected in October 2009. The main opposition Social Democratic Party (PSD) is struggling to pose a strong challenge to the PS.
• The Economist Intelligence Unit expects the PS to be in power after 2009, but that it will not renew its absolute majority. The expected severe recession in 2009 could contribute to a loss of support for the PS.
• Earlier fiscal consolidation efforts by the government are likely to be reversed in 2009-10 by a slowing economy. We expect the budget deficit to rise to 3.3% of GDP in 2009, amid pre-election spending, and 3.5% of GDP in 2010
• We forecast real GDP growth of 0.5% in 2008, a contraction of 1% in 2009 and only a small recovery to growth of 0.6% in 2010. The recession in 2009 will be driven by a fall-off in external demand and weak domestic activity.
• Inflation should fall gradually from late 2008, to average 2.6% for the year. Weak demand pressures should see a drop to 1.5% in 2009 and 2% in 2010.
• We estimate that the current-account deficit will be around 10% of GDP in 2008, before contracting to around 7% of GDP by 2010.

Monthly review

• A large demonstration has taken place in Lisbon in opposition to the government's earlier reform that introduced evaluation of teachers. The government may offer concessions to placate the teachers' unions.
• The governing PS continues to hold a substantial lead in opinion polls over the PSD, with left-wing parties retaining their support levels.
• The European Central Bank (ECB) has cut interest rates for the third time in three months in December, with the base rate now at 2.5%, ahead of an expected sharp slowdown and a euro area recession in 2009.
• The government has intervened in the financial sector, nationalising one bank because of liquidity problems, partly owing to alleged fraud, and arranging a takeover of another.
• The government has also promised funding to support ailing economic sectors, principally export and tourism, and money to pay debts owed to suppliers to the government.
• GDP growth in the third quarter of 2008 has been provisionally estimated at 0.7% year on year and 0% quarter on quarter. Portugal has not yet suffered the consecutive GDP declines seen in other euro area countries
• Unemployment rose to 7.7% in the third quarter, and wages grew more slowly than inflation. Consumer and business confidence is low.

Source: Country Report

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