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 Current prices Percentage changes, volume [euro] (2000 prices) billion 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 formation 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 services Imports of goods and 61.0 6.1 2.7 -14.4 1.0 2.1 services 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 deflator 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. StatLink http://dx.doi.org/10.1787/753838141106
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||Chapter 3: DEVELOPMENTS IN INDIVIDUAL OECD COUNTRIES|
|Publication:||OECD Economic Outlook|
|Article Type:||Statistical data|
|Date:||Nov 1, 2009|
|Next Article:||Slovak Republic.|