Country Report Portugal March 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 4-5% of GDP in 2009 and 2010.
• After zero real GDP growth in 2008, we forecast a contraction of 3.5% 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.
• Prices are expected to fall in the first half of 2009, and we forecast deflation of 1% for 2009 as a whole, as weak demand and the base effects of low oil prices combine. We forecast inflation of 0.5% 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 governing PS held its annual convention in late February, which hinted at the strategy that the party could adopt for the general election campaign, involving an appeal for an absolute majority to prevent instability.
• The main opposition PSD has presented its proposals for dealing with the economic crisis, which focus on supporting small and medium-sized firms.
• The government is providing extra credit lines to small and medium-sized firms. The Bank of Portugal (the central bank) has loosened its requirement for higher capital adequacy ratios for Portuguese banks.
• The European Commission is taking Portugal to the European Court of Justice in a long-running dispute over the state's privileged share in an energy firm.
• The detailed breakdown of GDP data in the fourth quarter of 2008 shows a decline of 1.8% year on year and 1.6% quarter on quarter. No growth was achieved in 2008, and the economy shrank for the three final quarters.
• The current account fell further into deficit in 2008, to 12.1% of GDP from 9.6% of GDP in 2007, as a result of widening trade and income deficits.
• Unemployment averaged 7.6% in 2008, but was rising by year-end. The employment level has been declining since mid-2008.

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