Portugal: Country Economic Forecast 2012

This report contains detailed economic forecasts and analysis for Portugal. The growth forecast for Portugual is a 3.5% contraction of its GDP in 2012.

Abstract

The authors of the report have lowered their growth forecast for Portugal further. GDP is now expected to contract by 3.5% in 2012, compared with 3% in our last report, followed by practically no growth in 2013. Moreover, this is conditional on Portugal meeting the targets set by the EU and IMF and on the Eurozone authorities arriving at a credible solution for the debt crisis. Standard & Poor's downgraded Portugal's sovereign debt to junk status in January, causing an adverse reaction from investors. In order to be able to access financial markets by 2013, Portuguese bond yields need to decline by over 900bp. Therefore, the need for yet another bailout is practically a foregone conclusion and the possibility of a default has increased significantly. The government has recently passed changes to various labour laws to address issues in its currently very inflexible labour market. These include increased flexibility in hiring and firing and reductions in holidays and layoff compensation. This is a very encouraging step that is essential to restore Portugal's waning competitiveness and promote growth in the long run. However, the government has made little progress on the fiscal front. The deficit target for 2011 was only met due to one-off transfers from banks' pension funds to the state. Although the EU and IMF believe that Portugal will be able to lower its deficit to 4.5% of GDP in 2012, this seems ambitious and we think the deficit will only fall to about 5% of GDP at best.