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Economic Bulletin - Winter 2011

  1. The evolution of the Portuguese economy over the forecast horizon will be indelibly marked by the process of structural adjustment of macroeconomic imbalances in the context of the Programme of Economic and Financial Assistance. The success of this adjustment is crucial to ensure the restoration of basic macroeconomic balances, the reduction of chronic external financing needs of the Portuguese economy, the return to a sustainable growth path and thus to resume the access of resident agents to international financial markets (see "Box 1 The challenge of resuming market financing in the medium term" in this Bulletin).
  2. The projections published in this article point to a contraction of the Portuguese economy in 2011 and 2012, followed by a virtual stagnation in 2013. This unprecedented contraction of economic activity reflects a significant drop in domestic demand, both public and private, accompanied by a significant growth of exports. However, the increase in exports is not sufficient to offset the impact of the adjustment of domestic demand level in a context of private sector deleveraging and fiscal consolidation.
  3. Regarding the domestic environment, the current projection is strongly affected by the adoption of fiscal consolidation measures in the State Budget for 2012 (OE2012). It should be noted that the budgetary targets for 2011 were only fulfilled by resorting to a significant amount of self-reversible measures (that is, measures that do not have a permanent impact in the fiscal deficit and imply further expenditure commitments in the near future). In particular, the partial transfer of the banks’ pension funds to the Social Security system implies an increase in future expenditure on pensions by the State. Additionally, continued deleveraging of the banking sector and the reduction of the indebtedness level of private agents, which are an integral part of the adjustment process of the economy, limit the ability to smooth private expenditure decisions.
  4. The composition of aggregate expenditure of the economy will change significantly over the projection horizon. The domestic conditioning factors will imply an unprecedented contraction in private consumption, especially in the consumption of durable goods, after a prolonged period of growth above GDP, and in private investment (both business and residential). The cumulative decline in the volume of public consumption will be around 7.5 per cent in 2011-2013, in contrast to the increase recorded in the past. On the contrary, exports are expected to evolve broadly in line with the external demand directed to the Portuguese economy, being the only component of aggregate demand recording positive rates of growth in the period 2011-2013. In this context, it should be highlighted that the current projection embodies a slowdown of global growth prospects in 2012, in particular for the euro area, in an environment shaped by the upsurge of international tensions.
  2. The changing composition of aggregate expenditure translates into a close to balance current and capital account in 2013, which is essential to ensure the solvency conditions of the external debt. It should be noted, however, that these projections are surrounded by high uncertainty, specially associated with the evolution of financial tensions on a global scale and, in particular, with the institutional response to the sovereign debt crisis in the euro area.
  3. Inflation measured by the Harmonised Index of Consumer Prices (HICP) is expected to remain elevated in 2012, receding to near 1 percent in 2013. The projection for 2012 is strongly affected by fiscal policy measures, particularly the reclassification of some goods and services subject to reduced VAT rates to the standard rate and the increase in administered prices and some excise taxes on consumption. On the contrary, the contraction of economic activity in Portugal, as well as the global economic slowdown, translate into a favourable evolution of production costs which, combined with the dissipation of the impact of fiscal measures, justify the decline in inflation in 2013. The current projection includes a very moderate increase in import prices of non-energy goods, a virtual stabilization of prices of commodities and a strong wage moderation, in a context where unemployment is expected to remain at historically high levels.
  4. The risks for economic activity are clearly on the downside, reflecting the impact on exports of a less buoyant world economy growth than the one considered, as well as the impact on domestic demand of possible additional fiscal consolidation measures with a direct impact on households’ income. The risks for inflation are balanced since the possibility of lower growth in activity offsets the risks of further increases in indirect taxes and administered prices.
  5. The projections presented in this article indicate that the contraction of economic activity in 2011 was less pronounced than expected in the autumn issue of the Economic Bulletin, reflecting economic activity developments in the second half less unfavourable than anticipated, especially for exports. For 2012, a larger contraction of economic activity is envisaged, resulting from consolidation measures included in OE2012 and from the reassessment of the decline in domestic demand. These measures, which go beyond those detailed in Programme of Economic and Financial Assistance, are intended to compensate for a weaker structural fiscal consolidation than envisaged in 2011. Additionally, the downward revision of global economic growth led to a non-negligible downward revision in exports. As for inflation, the projection for 2012 was significantly revised upwards, reflecting the adoption of additional fiscal measures.


This Economic Bulletin includes, as usual, four articles written by economists of Banco de Portugal (or co-authored with external researchers). The articles, of the sole responsibility of the authors, are as follows:

  • "Fiscal devaluation", by Isabel Horta Correia
  • "A comparison of cyclical developments in various geographical areas of reference vis-à-vis Portugal," by Raul Guerreiro, Paulo Rodrigues and Jorge Andraz
  • "Wage differences between public and private sectors in the period preceding the adoption of the euro: an application based on longitudinal data," by Maria Manuel Campos and Mário Centeno
  • "Sector credit risk in the euro area" by Martín Saldías

Lisbon, 10 January 2012