Country Report Portugal July 2009

Outlook for 2009-10

• In 2009 Portugal faces the twin challenges of a severe economic recession and a closely fought election cycle. Before and after the election, respective governments are expected to focus on alleviating the effects of the recession.
• The Economist Intelligence Unit's central forecast is that the Socialist Party (PS) will remain in power. The opposition Social Democratic Party (PSD) has gained momentum from a victory in the European Parliament elections.
• Earlier fiscal consolidation efforts by the government will be reversed in 2009-10 by a slowing economy. We expect the budget deficit to rise to around 7% of GDP in 2009-10.
• After zero real GDP growth in 2008, we forecast a contraction of 4.1% in 2009 and a fall of 0.4% in 2010, with growth only resuming from mid-year. This will be driven by declines in external demand and domestic activity.
• Inflation turned negative in March-May 2009, and we forecast deflation of 0.7% for 2009 as a whole, as a result of weak demand and the base effects of earlier high oil prices. 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 main opposition PSD secured an important victory for the party at the European Parliament elections in June, with 31.7% of the vote, against the PS's 26.6%. This was against the run of opinion polls in the lead-up to the election.
• The PSD's election upset gave the party some electoral momentum ahead of the general election in late September, allowing it to set the agenda on a number of topics and catch the PS leadership off-guard.
• The cabinet has issued some changes to the tax code that will come into force in 2010, notably an investment incentive and a more attractive personal income tax rate for highly qualified individuals.
• Debate has continued over the value of high-profile, large-scale public investment projects. The European Commission intends to open an excessive-deficit procedure against Portugal over the rising budget deficit.
• Real GDP declined by 3.7% year on year and 1.6% quarter on quarter in the first quarter of 2009, with fixed investment falling by 17% year on year and exports and imports of goods and services both declining by over 20%.
• The Portuguese trade deficit narrowed substantially to ???4bn in the first quarter of 2009, from ???5.4bn a year earlier.
• Households' non-performing loans are on the rise, at 2.54% in April 2009.

Source: Country Report