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Growth resumed in the second quarter of 2009, but will remain subdued as private sector deleveraging constrains the recovery. As a result, unemployment is likely to increase to around 10% in 2010. The budget deficit is set to rise further in 2010 and 2011, following a substantial increase in 2009 due to the combined impact of the fiscal stimulus and the recession. Core inflation, after dropping to near zero, may increase rather slowly over the projection period.

Despite anaemic growth, designing and gradually implementing fiscal consolidation is a major priority. Structural reforms to promote competitiveness are key to achieving higher growth through more dynamic exports, while the pursuit of education reform should help foster longer-term potential.

The economy has bottomed out

The economy came out of recession in the second quarter of 2009, with GDP growing at 0.5% (quarter-on-quarter). Although private consumption showed some recovery, the main contributor to GDP growth was exports. Recent hard and soft indicators point to a stronger pick-up in activity in the third quarter. Further, financial tensions have eased considerably, with a marked reduction in risk premia. Unemployment, however, has continued to rise. Year-on-year headline inflation has been negative since March, mainly reflecting base effects in energy and food prices. Core inflation has also moderated, bordering negative territory.

Indebtedness acts as a drag on recovery

Long-standing current account imbalances, translated into rising indebtedness, limit the pace of recovery, which may be somewhat weaker than that of the euro area. Some private sector balance sheet adjustment is taking place. The households saving rate has increased markedly in 2009, and should decrease only slightly over the projection horizon. The rebalancing of internal saving and investment, which will remain a medium-term concern, limits the contribution of domestic demand to growth.


Fiscal consolidation is a major priority

The government adopted in 2008 and early 2009 a n umber of fiscal stimulus measures, with a total discretionary impulse of around 1.1% of GDP, three-fifths of which were on the expenditure side. The bulk of the impact of this package is likely to be felt in the second half of 2009, as the implementation of spending measures (mainly public investment and support to firms) gathers pace. The budget deficit is projected to reach more than 6.5% of GDP in 2009 and to increase further in 2010 and 2011, despite the end of the stimulus package. Implementing a sound consolidation strategy as soon as the economy strengthens is therefore essential to ensure fiscal sustainability.

Growth should only pick up significantly toward end-2011

Economic growth is projected to gradually gain momentum, and should reach 0.8% in 2010 and 1.5% in 2011, mainly driven by domestic demand. Unemployment is expected to record a further rise in 2010, to around 10%, before declining marginally towards the end of the projection horizon. Core inflation should increase somewhat from early 2010 onwards, but stay very low. After improving by more than 2 percentage points in 2009, the current account deficit is projected to partly backtrack, mainly due to higher oil prices and the continuing increase in foreign indebtedness, which impacts adversely on net investment income.

Financial investor confidence is the main downside risk

Risks to the above scenario are broadly balanced, and mainly linked to global financial and economic conditions. If the euro area recovery gathers pace beyond what is projected, activity in Portugal will likewise accelerate. Downside risks could materialise if the authorities fail to implement a credible fiscal consolidation plan, in which case credit conditions for both the state and private borrowers might significantly deteriorate.
Portugal: Demand, output and prices

                             2006   2007  2008   2009   2010   2011

                           prices      Percentage changes, volume
                           [euro]           (2000 prices)

Private consumption          101.6   1.6    1.7   -1.0    0.6    0.9
Government consumption        32.1   0.0    0.7    1.4    0.6    0.6
Gross fixed capital           33.8   3.1   -0.7  -13.6    0.4    2.9
Final domestic demand        167.5   1.7    1.0   -3.2    0.6    1.2
  Stockbuilding (1)            0.7   0.1    0.3   -0.7    0.1    0.0
Total domestic demand        168.2   1.7    1.3   -3.8    0.6    1.2
Exports of goods and          48.2   7.8   -0.5  -14.7    1.7    3.2
Imports of goods and          61.0   6.1    2.7  -14.4    1.0    2.1
  Net exports (1)            -12.8   0.0   -1.4    1.5    0.1    0.2
GDP at market prices         155.4   1.9    0.0   -2.8    0.8    1.5
GDP deflator                         3.0    2.1    0.6    0.2    1.0
Memorandum items
Harmonised index of            --    2.4    2.7   -0.9    0.7    1.0
 consumer prices
Private consumption            --    2.7    2.6   -0.9    0.8    1.0
Unemployment rate              --    8.0    7.6    9.2   10.1    9.9
Household saving               --    6.1    6.4    9.6    8.9    8.8
 ratio (2)
General government             --   -2.7   -2.8   -6.7   -7.6   -7.8
 financial balance (3,4)
Current account                --   -9.4  -12.1   -9.7  -10.7  -11.1
 balance (3)

(1.) Contributions to changes In real GDP (percentage of real
GDP in previous year), actual amount In the first column.

(2.) As a percentage of disposable income.

(3.) As a percentage of GDP.

(4.) Based on national accounts definition.

Source: OECD Economic Outlook 86 database.

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Publication:OECD Economic Outlook
Article Type:Statistical data
Geographic Code:4EUPR
Date:Nov 1, 2009
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