Country Report Portugal September 2009

Outlook for 2009-10

• In 2009 Portugal faces the twin challenges of a severe economic recession and a closely fought election. Before and after the election, respective governments are expected to focus on alleviating the effects of the recession.
• The Economist Intelligence Unit's central forecast is that the Socialist Party (PS) will remain in power, but the renewed strength of the opposition Social Democratic Party (PSD) will ensure the outcome of the election is close.
• Earlier fiscal consolidation efforts by the government will be reversed in 2009-10 by a slowing economy. We expect the budget deficit to rise to over 7% of GDP in 2009-10.
• We forecast a GDP contraction of 3.6% in 2009, and the economy is expected to achieve no growth in 2010 as a whole. Exports and fixed investment have driven the downturn so far, but exports should recover more quickly.
• Inflation turned negative in March-July 2009, and we forecast deflation of 0.7% for 2009 as a whole, as a result of weak demand and the base effects of earlier high oil prices. 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% of GDP by 2010.

Monthly review

• The Portuguese general election campaign is entering its most intense weeks, after a quiet August period. The race is mainly between the PS and the PSD, and the gap between them has tightened in recent months.
• The PS government has distanced itself from the presidency over the past year, and a minor spat occurred in August. However, the president, Anibal Cavaco Silva, may yet play a decisive role in government formation talks.
• The PSD has struggled with its presentation of party lists, which seemed to counter the party's recent rejuvenation drive. The PS has been criticised over the cancellation of a television programme that criticised the government.
• The government has published details of the performance of the state-owned holdings, which recorded lower profits in 2008 amid a steep downturn.
• A first estimate of GDP growth in the second quarter of 2009 saw growth of 0.3% quarter on quarter, a turnaround from three straight quarters of decline.
• The unemployment rate rose to 9.1% in the second quarter, up from 8.9% a quarter earlier, but was slightly lower than the euro area average (9.3%).
• The Portuguese current-account deficit improved in the second quarter of 2009. For the first half of the year as whole, the deficit was down by ???1.8bn to ???6.9bn, helped by lower oil prices, which lowered the trade deficit.