Country Forecast Portugal June 2018 Updater

Country Forecast Portugal June 2018 Updater

  • June 2018 •
  • Report ID: 1697330 •
  • Format: PDF


  • Portugal is led by a centre-left Socialist Party (PS) minority government. The administration is backed in parliament by three external supporters: the Left Bloc (BE), the Portuguese Communist Party (PCP) and the Greens (PEV). Together, these parties control 122 seats out of the 230 in the unicameral parliament.
  • The cabinet, led by António Costa, has thus far succeeded in "turning the page on austerity" while remaining within the EU's fiscal constraints. Its policies prioritise stimulating demand by raising incomes for lower- and middle-wage earners, civil servants and pensioners. Mr Costa has been boosted by strong economic performance, and the PS was the biggest winner of the October 1st local elections. Some political setbacks-particularly an ineffective response to deadly wildfires in northern and central Portugal in mid-October-have hindered Mr Costa's popularity, albeit marginally. The Economist Intelligence Unit expects the government to complete its term, which ends in October 2019.
  • Following real GDP growth of 2.7% in 2017, we expect the economy to expand by 2.3% this year and to average 1.6% in 2019-22. We expect the current account to remain near balance for the duration of the forecast period (2018-22).
  • Government bond yields have fallen to near historical lows, partly owing to quantitative easing purchases made by the European Central Bank (ECB), but also to economic improvements and credit rating upgrades. However, yields may remain more sensitive to political developments than elsewhere in the euro area. We believe that Greece is likely to leave the bloc within the forecast period, but the fallout should be contained.
  • Assistance to struggling banks caused the deficit to expand in 2014 (from 4.5% of GDP to 7.2%) and 2015 (from 3.2% to 4.4%)-far larger than the EU-mandated limit of 3% of GDP. Following a shortfall of 3% in 2017 (the deficit widened from an underlying 0.9% of GDP owing to the recapitalisation of a public bank and the country's largest lender, Caixa Geral de Depósitos, CGD), we expect a reduction, to 1%, in 2018. We forecast that the deficit will expand gradually, to 2% of GDP in 2022.
  • We expect public debt to fall from a peak of 130.6% of GDP in 2014 to about 114% in 2022. In 2019-22 larger primary surpluses will be needed to keep the public debt/GDP ratio on a downward path as interest payments rise.


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