Country Report Portugal January 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 likely 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 forecast real GDP growth of 0.3% in 2008, a contraction of 2% in 2009 and only a small recovery with negligible growth in 2010. The recession will be driven by both a fall-off in external demand and weak domestic activity.
• Inflation will continue to fall in the first half of 2009, and we forecast mild deflation of 0.3% for 2009 as a whole, as weak demand and the base effects of low oil prices combine. We forecast inflation of 1.8% in 2010.
• We estimate that the current-account deficit will be around 11.5% of GDP in 2008, before contracting to around 8% of GDP by 2010.

Monthly review

• Relations between the PS government and the president, Anibal Cavaco Silva, have continued to deteriorate, as the government pushed through, against the president's will, a statute increasing the political autonomy of the Azores.
• Manuel Alegre, a backbench member of the PS, has emerged as a leading opposition voice to the government and has continued to criticise the government from within the party.
• The government has unveiled new stimulus measures to support key economic sectors. It has also delayed the publication of its medium-term budget outlook, to take account of recent economic developments.
• The Bank of Portugal (central bank) has rescued a small bank, Banco Privado Portugues (BPP), which follows the nationalisation of another in November.
• GDP contracted by 0.1% quarter on quarter in the third quarter of 2008, bringing the year-on-year rate down to 0.6%. The outlook for the fourth quarter is poor, with consumer and producer confidence at extreme lows.
• The trade deficit continued to widen in July-September 2008, marking its highest level at 5.3bn, up from 5.2bn a year earlier. The current account is also reaching record levels, equivalent to over 12% of GDP in the third quarter.

Source: Country Report