Portugal's economic recovery will continue in the coming quarters, as policy reversal under the new administration away from austerity will boost household spending, which will be the main driver of growth in 2016-2017. However, the recovery will proceed at a modest pace, as a debt overhang and precarious credit market conditions will remain a major impediment to a faster pace of growth.
Portugal's Socialist Party-led minority government will become increasingly unstable as it walks an ever tighter rope between fulfilling demands for fiscal prudence by its bailout creditors and demands for better workers' rights by domestic labour unions. Nevertheless, the government will weather the crisis for now, as a politically sensitive environment in the European Union in light of 'Brexit' risks will underpin the creditors' leniency on Portugal's austerity relaxation course.
Economic growth in Portugal entered a soft patch in the beginning of 2016, as reflected in real GDP growth slowing to 0.9% y-o-y in Q116, from 1.3% the previous quarter. Nevertheless, with these headwinds now broadly behind us, we remain of the view that the rebound in the Portuguese economy will proceed in the coming quarters, with private consumption acting as the main driver of growth. As such, Portugal's rebound from its three-year long recession in 2011-2013 will remain broadly in place in 2016, as reflected in our forecast for a 1.6% full-year expansion of real GDP growth. We retain our subdued growth outlook for the country and have not modified our forecasts for 2016.
Risks to Portugal's growth outlook stem from the possibility that there emerge disagreements between the ruling Socialist Party and the two radical left-wing parties that will support the Socialist-led minority government, i.e. the Left Bloc and the Socialist Party. If the two far left parties raise demands over a more radical policy trajectory for Portugal, for instance eurozone exit, this could have dramatically negative impact on the political stability outlook for the country and market perceptions of its sovereign risk profile.
|Real GDP growth, % y-o-y||0.9||1.5||1.7||1.6|
|Nominal GDP, EURbn||173.4||179.4||190.1||196.7|
|Consumer price inflation, % y-o-y, eop||-0.3||0.3||1.2||1.5|
|Exchange rate EUR/USD, eop||0.82||0.92||0.91||0.87|
|Budget balance, % of GDP||-4.5||-3.4||-3.2||-3.0|
|Current account balance, % of GDP||0.6||1.0||1.1||0.9|
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