Country Report Portugal May 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% 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

• The political parties are preparing for the first of three elections in 2009, the European Parliament elections in June.
• In a bid to quieten internal opposition, the PSD leader, Manuela Ferreira Leite, has picked a rising party member, Paolo Rangel, to lead her European election bid. The PS has selected an independent supporter of the party, Vital Moreira.
• Regarding the general election, public debate has raised the possibility of a unity coalition between the two main parties, the PS and PSD, after the election, in order to preserve political stability.
• The budget deficit rose sharply in the first quarter of 2009, and at 2.4bn, it was nearly three times larger than in the year-earlier period, as revenue dropped off strongly in line with the economic deceleration.
• The government has decided to extend the length of compulsory education to 12 years from the current nine, in stages from September 2009. Pre-school education is also to be made universally free.
• Portuguese GDP fell by 1.5% quarter on quarter in the first quarter of 2009, according to the flash estimate. This brings the year-on-year decline to 3.7%.
• Inflation was negative in March and April, at -0.4% and -0.5% respectively, driven by lower transport and communication costs.

This report covers the following industry codes:
SIC Code: 47
NAICS Code: 48