Country Report Portugal November 2009

Outlook for 2010-11

• In 2009-11 Portugal faces a period of lower political stability and decreased government effectiveness, as the incumbent Socialist Party (PS) has not gained an absolute majority and has formed a minority government.
• The PS government is expected to look for co-operation from other parties when passing legislation. A poor relationship with the president, Anibal Cavaco Silva, will be detrimental to political stability.
• The main opposition Social Democratic Party (PSD) suffered a defeat in the election and may select a new leader.
• The new government's main objectives will be constrained by its need to foster economic and employment growth and cut the budget deficit. The budget deficit is expected to rise to just under 7% of GDP in 2009-10.
• The Economist Intelligence Unit estimates that GDP will contract by 3.5% in 2009, followed by weak economic growth in 2010 and 2011, of 0.1% and 0.9%, respectively. Exports and fixed investment will remain far below 2008 levels.
• We estimate deflation of 1% for 2009 as a whole, owing to weak demand and the base effects of earlier high oil prices. Inflation should pick up slowly thereafter, but remain low, at an average of 0.6% in 2010-11.
• The large current-account deficit, at 12.1% of GDP in 2008, is expected to shrink to below 9% of GDP by 2010 and to 7.6% by 2011.

Monthly review

• The new PS minority government has been inaugurated. The prime minister, Jose Socrates, has replaced eight out of 16 ministers in government, but has retained most of the key ministers and his inner political circle.
• The PSD continues to deal with the fallout from the general election defeat and a weak showing at local elections. The party is likely to hold off on leadership elections until after the government has passed its budget.
• The government presented its programme for its new term on November 2nd. Its priorities include continued public-sector reform, to cut the fiscal deficit; longer compulsory education; and social policy to reduce inequality.
• The central government's budget deficit was 2.5 times larger in January-September 2009 than in the year-earlier period. The social security surplus, which normally weighs against the deficit, has fallen back considerably.
• Consumer price inflation has remained weaker in Portugal than in most other EU countries, at -1.8% (EU harmonised measure) in September 2009. Producer prices bounced back slightly in the third quarter, however.