Country Report Portugal July 2008

Outlook for 2008-09

• The Socialist Party (PS) government led by the prime minister, Jose Socrates, will continue to make some progress with implementing a wide-ranging reform programme to improve the efficiency of the public administration.
• Fiscal policy is expected to remain tight in 2008-09, but there could be spending overruns, as the government's reform of the public administration is likely to see further delays because of trade union and civil service resistance.
• The Economist Intelligence Unit expects the government to bring down the general government deficit only slightly further in 2008-09, following a sharp fall in recent years from 6.1% of GDP in 2005 to 2.7% in 2007.
• Real GDP growth rose from 1.3% in 2006 to 1.8% in 2007, boosted by external demand. We forecast that it will fall back to 1.4% in 2008, on account of the external economic slowdown, and to 1.3% in 2009.
• Inflation is expected to stabilise and then fall from mid-2008. We expect average inflation to be 2.7% in 2008 and 2.3% in 2009.
• We forecast that the current-account deficit will fall from 9.8% of GDP in 2007 to 8.5% of GDP in 2009.

Monthly review

• Manuela Ferreira Leite has been confirmed as the new PSD party leader and has attacked the government for its expenditure on large-scale public-works projects, using a possible line of attack for next year's general election.
• The government has secured agreement from the social partners on a modest reform of the labour market, which is intended to increase flexibility. The opposition PSD also generally backed the direction of the reform.
• The labour market reform shortens the length of time that dismissals should take and also makes fixed-term contracts less attractive to employers. Provisions are also made for improved parental leave.
• The OECD's latest survey of the Portuguese economy warns about the slow rate of GDP growth, which is preventing living standards from converging with those of other developed countries.
• Portugal's trade deficit widened in the first quarter of 2008, reaching €5.2bn, up from €4bn a year earlier. The widening was attributable to export value growth slowing more than the import bill.
• The Portuguese stockmarket lost considerable ground in the first half of 2008, in line with other European stockmarkets.