Country Report Portugal June 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 around 6% 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 0.3% 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-April 2009, and we forecast deflation of 0.7% for 2009 as a whole, as weak demand and the base effects of low oil prices combine. 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

• Campaigning has continued for the European elections on June 7th 2009. The opposition parties are mainly trying to campaign on national issues, where they can attack the government. The PS is focusing on European issues.
• The PS has maintained a steady lead in opinion polls for the European elections, although it is polling lower than in general election polls. The PSD would gain much-needed general election momentum if it won on June 7th.
• The state guarantee schemeestablished during an intense period of the global financial crisis in late 2008 in order to support banks issuing new debthas been used by just five banks, for about 5bn (out of 20bn).
• The government has resolved to sell one of the banks that it took over in late 2008, BPN, although the state will have to provide financing to any private seller.
• The fate of a second nationalised bank, Banco Privado Portugues, is still unclear, and some account holders are disputing the government's actions.
• Unemployment rose sharply, by 1.1 percentage point, between the fourth quarter of 2008 and the first quarter of 2009, to 8.9%.
• The current-account deficit fell to 3.4bn in the first quarter of 2009, from 4.6bn a year earlier. Portugal has one of the largest deficits in the OECD.

Source: Country Report

This report covers the following industry codes:
SIC Code: 70
NAICS Code: 72