Country Report Portugal October 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 is set to form 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 economic priority will be to cut the budget deficit, which has risen steeply, owing to a weak economy. The Economist Intelligence Unit expects the budget deficit to rise to just under 7% of GDP in 2009-10.
• We estimate a GDP contraction of 3.5% in 2009, and the economy is forecast to achieve weak growth in 2010 and 2011, at 0.1% and 0.9%, respectively. Exports and fixed investment will remain far below 2008 levels.
• We estimate deflation of 0.9% 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 8% of GDP by 2010 and to 7.1% by 2011.

Monthly review

• The general election on September 27th returned the PS to power with 36.6% of the vote, but the party failed to renew its absolute majority obtained at the 2005 election.
• The main opposition PSD recorded a particularly weak result, with a 29.1% vote share, despite high expectations following its European elections victory.
• The centre-right Popular Party was the unexpected winner of the election, with just over 10% of the vote and third place overall, displacing the previously stronger far-left Communist Party and Left Bloc.
• The days before the election were marked by a dispute between the PS government and the presidency over accusations of eavesdropping. The president attacked the PS over this issue following the general election.
• The Portuguese economy has shown signs of stabilising, following a steep collapse in late 2008 and early 2009, with exports and industrial production growing on a monthly basis. Private consumption indicators remain weak.
• Banks' non-performing loans to both companies and households continue to rise sharply. Credit growth, conversely, is slowing towards zero.

This report covers the following industry codes:
SIC Code: 2834;80;48;60
NAICS Code: 3254;62;517;52