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Real GDP declined by 1.6 per cent in 2011. This is 0.3 pp less than anticipated in the autumn forecast and is the result of stronger exports and private consumption, while imports weakened more than projected. The current-account deficit as a share of GDP narrowed further by about 3 pps in 2011, partly due to a strong decline in imports, in line with the fall in domestic demand. Strong data for the first two months of 2012 confirm that export growth has become more broad-based, with increasing market shares outside the EU partly compensating for the deceleration of exports to the EU. Despite some recent improvements, the loss of external price competitiveness during the past decade has not yet been reversed.
Risks to the forecast appear to be balanced. While the exports projection is on the cautious side assuming constant export market shares, there are downside risks to domestic demand related to a stronger-than-expected deterioration of the labour market. On the positive side, continued progress in implementing the Economic Adjustment Programme could boost investor confidence, thereby further lowering sovereign bond yields and attracting foreign investment.
In 2012, Portugal is undertaking consolidation efforts worth over 5 per cent of GDP. Expenditure-reducing measures account for most of the effort, mainly wage and pension cuts, but also expenditure cuts in the health sector. In addition, reductions in public sector employment are to continue and access to some social transfers is to be tightened. On the revenue side, the consolidation plans for 2012 rely mostly on higher indirect taxation, as the VAT structure is set to change, with more goods and services being taxed at the higher intermediate and standard rates. Regarding direct taxation, the focus is mainly on broadening the tax base by reducing deductions and exemptions applicable to personal and corporate income taxation.
The 2012 target for the general government deficit of 4.5 per cent of GDP remains valid. However, downside risks to the fiscal projection related to the macro outlook are starting to materialise, with the growth composition tilting more strongly towards net exports and away from domestic demand, as is evidenced by the more pronounced fall in private consumption and the substantial worsening of the labour market situation. As a result, the deficit in 2012 is now projected to be 0.2 pp higher than in the autumn 2011 forecast. However, the government is committed to reaching the 2012 fiscal objectives. A tighter budgetary execution is foreseen.
Full forecast (Portugal)