Country Report Portugal February 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 2010.
• We estimate zero real GDP growth in 2008, a contraction of 2.8% in 2009 and a further fall of 0.7% in 2010, with growth only resuming from mid-year. This will be driven by a fall-off in external demand and domestic activity.
• Inflation will continue to fall in the first half of 2009, and we forecast mild deflation of 0.5% for 2009 as a whole, as weak demand and the base effects of low oil prices combine. We forecast inflation of 1.3% in 2010.
• We estimate that the current-account deficit will be around 11% of GDP in 2008, before contracting to around 7-8% of GDP by 2010.

Monthly review

• The prime minister, Jose Socrates, has been linked with impropriety over the approval of a retail development when he was environment minister, but the lack of official confirmation has allowed him to see off the challenge for now.
• Opinion polls continue to give the two far-left parties, the Portuguese Communist Party and Left Block, a substantial following of a combined 20%, which is cutting into the support of the two main parties, the PS and PSD.
• The government has released a supplementary budget that increases the fiscal deficit to 3.9% of GDP in 2009. It includes economic support measures, such as technology and school investment and employment subsidies.
• The budget deficit deteriorated slightly at the end of 2008, as the economic slowdown took hold and revenue dropped off. The government has not yet released its official assessment of the fiscal deficit for 2008.
• A credit ratings agency, S&P, has cut its rating on Portuguese sovereign debt by one notch to A+, citing the economic downturn and structural problems.
• An initial estimate for the final quarter of 2008 shows GDP contracting by 2% quarter on quarter and by 2.1% year on year, with zero growth for the year.
• Inflation fell to 0.2% in January 2009, as domestic price pressures weakened. Industrial producer prices are also falling rapidly.

Source: Country Report