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Economic Bulletin – Spring 2012: Outlook for the Portuguese Economy 2012-2013

  1. The evolution of the Portuguese economy in 2011, as well as over the projection horizon, takes place within the framework of EU/IMF Financial Assistance Programme (FAP). Underlying this programme is a strategy of adjustment of the macroeconomic imbalances of the Portuguese economy and of increase of its potential growth, based on three pillars: fiscal consolidation, financial system stability and structural change. The fulfillment of these objectives is essential to promote a sustained growth and convergence with the euro area in the medium to long run.
  2. In the context of this process of adjustment of macroeconomic imbalances, Gross Domestic Product (GDP) declined by 1.6 per cent in 2011, as a result of the behavior of all domestic demand components, partially compensated by a robust growth of exports of goods and services.
  3. The current projections continue to point to a reduction of domestic demand over the projection horizon and to a pivotal contribution of exports to the growth of economic activity, although slowing down when compared to the increase recorded in 2011, given the assumptions for external demand. Within this framework, a significant decline in economic activity is projected for 2012 (3.4 per cent), followed by a stabilization in 2013.
  4. Over the projection horizon, expenditure recomposition is expected to continue, with a  noteworthy reduction of domestic demand. The evolution of private consumption is expected to remain constrained by the unfavorable prospects for disposable income developments, against a background of deteriorating labor market conditions and the expected impact of fiscal consolidation. Public consumption is also expected to decrease over the projection horizon, although more significantly in nominal terms than in volume. Investment is projected to decline in 2012 at a pace similar to the one recorded in 2011, reflecting worsening demand prospects for firms and, to a smaller extent, the restrictiveness of financing conditions. However, business investment is projected to show a recovering trend in 2013, favored by external demand developments, which should also imply that exports remain a key contributor to GDP growth.
  2. The trade balance is expected to show a surplus and the current and capital account is projected to show a near-balance position at the end of the projection horizon.
  3. Inflation, as measured by the Harmonized Index of Consumer Prices, is expected to remain relatively stable in 2012, decreasing significantly in 2013. The projection for 2012 reflects to a large extent increases in indirect taxation and administered prices. Therefore, the fading out of these effects in 2013 should lead to an inflation dynamics more in line with production costs. In particular, the evolution of wages is expected to be substantially constrained by the situation in the labor market, as well as by legislative measures, e.g. the suspension of the Christmas and holiday subsidy payments of public employees. Additionally, import prices are projected to decelerate over the projection horizon.
  4. The risks surrounding the current projection point to more unfavorable economic activity developments. These risks stem to a large extent from external-driven factors, in particular related to the sovereign debt crisis in the euro area, which may constrain external demand developments. At the domestic level, in case the macroeconomic environment weakens further, the adoption of additional measures that ensure the fulfillment of the fiscal goals may be necessary. Inflation risks are broadly balanced, given that a further reduction in GDP would tend to imply a lower price growth, but the possible need for additional measures concerning indirect taxation and administered prices could translate into higher inflation.
  5. The correction of the Portuguese economy macroeconomic imbalances implies a protracted adjustment of expenditure levels of the public and private sectors and of the leverage of the banking sector. However, the deleveraging process should assume an orderly and gradual nature, without compromising the financing of the most competitive sectors in the economy, thus demanding a close monitoring by the authorities, as specified in the FAP. The way in which these inescapable objectives are achieved will condition the economic activity and employment trajectories in the coming years. A successful adjustment of the Portuguese economy requires a substantial improvement in the quality of the driving factors of potential growth and more specifically of the quality of the institutions. The strict fulfillment of the structural reform goals included in the FAP, not only at a legislative level but especially in terms of their effective implementation is thus essential in order to allow for a sustainable growth path of the Portuguese economy.


This Economic Bulletin includes, as usual, articles written by economists of Banco de Portugal (in some cases co-authored with external researchers). These articles, of the sole responsibility of the authors, are the following:

  • Issue for Discussion: “Segmentation”, by Mário Centeno and Álvaro Novo
  • “Competition in the Portuguese Economy: a view on tradables and non tradables”, by João Amador and Ana Soares
  • “Fiscal Institutions and Public Spending Volatility in Europe”, by Bruno Albuquerque
  • “Welfare Costs of Inflation with Distortionary Taxation”, by Bernardino Adão
  • “Revisiting the effectiveness of monetary and fiscal policy in the US, measured on the basis of structural VARs”, by Manuel Coutinho Pereira

Banco de Portugal, 29 March 2012