Country Report Portugal June 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 fall to just below 2.6% of GDP 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 1.5% in 2008, on account of the external economic slowdown, and to 1.4% in 2009.
• Inflation is expected to fall from a rate of 3.1% in March, to end 2008 at just above 2%. We expect average inflation to be 2.4% in 2008 and 2.2% in 2009.
• We forecast that the current-account deficit will fall from 9.8% of GDP in 2007 to 7.9% of GDP in 2009.

Monthly review

• The opposition Social Democratic Party (PSD) elected Manuela Ferreira Leite as its new leader in late May. She replaces Luis Felipe Menezes, who lasted only seven months in the job.
• Ms Ferreira Leite faces a tough task in differentiating her party from the government ahead of the election due in 2009, although recent gains in the opinion polls by far-left parties may help in this regard.
• The government has made some progress with gaining support for its labour market reform, securing the assent of one of the main trade union groups, but a more militant trade union group staged a demonstration against the reform.
• The economy grew by only 0.9% year on year in the first quarter of 2008 and contracted by 0.2% quarter on quarter. Private consumption and fixed investment held up relatively well, but exports continued to decelerate.
• The unemployment rate fell to a recent low of 7.6% in the first quarter of 2008, having averaged 8% in 2007. However, even if it drops slightly further in the second quarter, this will be a higher trough than in previous cycles.
• Economic indicators have continued to weaken in the first half of 2008, with the central bank's private consumption indicator moving into negative territory in April and consumer confidence remaining lower than in 2006-07.