05 November 2013

Portugal: Autumn 2013 economic forecast - Tentative signs of a turnaround

There has been a moderate improvement in the economic outlook, inflation is decelerating and risks to the macro-economic outlook are tilted to the downside in 2014 and 2015. The debt-to-GDP ratio is expected to peak slightly below 128 per cent in 2013 and to decline thereafter.

Real GDP growth in the second quarter surprised on the upside, increasing by 1.1 per cent q-o-q. GDP growth was primarily driven by domestic demand while the growth contribution of net exports fell as strong export growth was partly offset by fast growing imports.

Real GDP is now forecast to contract by 1.8 per cent in 2013 and to expand by 0.8 per cent in 2014. Net exports are expected to remain the main growth drivers while the growth
contribution of domestic demand is forecast to turn positive in 2014. Real GDP growth is projected to reach 1.5 per cent in 2015, with a broadly balanced contribution from external trade and domestic demand.

The situation in the labour market has stabilised in line with economic activity. The unemployment rate is now projected to average 17.4 per cent in 2013, to peak at 17.7 per cent in 2014 and to drop back to 17.3 per cent in 2015.

Economic rebalancing towards the tradable sectors continues at a fast pace. Exports have been booming since the beginning of the year with a broad-based contribution of various production sectors and significant gains in shares in both goods and services export markets.

With HICP inflation remaining significantly below the euro-area rate in the first half of this year, the annual average inflation is forecast at 0.6 per cent this year, 1 per cent in 2014 and 1.2 per cent in 2015.

High frequency indicators suggest slight upward risks to the headline growth forecast for 2013. However, the sustainability of the projected recovery in 2014-15 is contingent on positive trade and financial market developments, which remain fragile. The ability of Portugal to progressively regain access to the sovereign-bond market at more favourable interest rates remains a key forecast assumption.

The fiscal balance is expected to reach -4.0 per cent of GDP in 2014 and -2.5 per cent in 2015. The fiscal projections for 2014 are underpinned by consolidation measures worth about 2.3 per cent of GDP, mostly permanent expenditure reductions.

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