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Portugal - Economy

The Portuguese economy resisting the prevailing gloom in Europe during 2019. Activity remained strong, with GDP rising by 0.5% in the first quarter, or 1.8% at an annual rate, compared with 1.2% in the euro zone. Following the trend of 2018, Portugal's good economic health came mainly from private consumption fueled by rising wages and employment dynamics. The preliminary data, said the national statistics institute, "reflect a significant acceleration in investment." The government deficit has fallen from 7.2% of GDP to 0.5% of GDP since 2014, and the unemployment rate from a peak of 17.9% in early 2013, to about 6% currently. The tourism sector has been the largest driver of the export recovery in Portugal.

Despite the spectacular recovery and the fall of unemployment, a sense of precariousness and low wages are everywhere in Portugal. The minimum wage is only $669 (600) per month a number that has not prompted the return of many young adults, who left during the crisis. Between 2008 and 2014, 120,000 people left Portugal per year. Twenty percent were highly skilled workers. Unlike the previous generations, the young Portuguese leaving abroad do not dream of returning home.

Moody's credit rating service cut Portugal's rating to junk status on July 5th, 2011, saying the outlook for the country was negative. This meant that according to Moody's, Portuguese government bonds were a high-risk investment. The agency said there were heightened concerns that Portugal may not be able to fully achieve the spending cuts, tax hikes and economic growth that were part of its loan agreement with the European Union and International Monetary Fund. Moody's also said there was a growing risk Portugal may need another bailout.

Portugal was going through a critical financial situation, as it had experienced in recent years incentives created by Governments of Prime Minister Jos Scrates, who in an attempt to avoid a recession during his administration, increased dramatically the country's foreign debt, making the situation of debt interest payments unsustainable.

Portugal has long struggled with low growth, productivity, and competitiveness, and in 2010 was beset by added pressures stemming from the wider eurozone financial crisis. Wages remain among the lowest in the EU with a minimum wage of 485 per month. In competitiveness, Portugal ranks 46 out of 139 countries in the 2010-2011 World Economic Forums Global Competitiveness Report, with Switzerland ranked highest and Chad lowest. In 2009, the OECD ranked Portugal lowest among the southern periphery eurozone countries in worker efficiency, with a GDP generation level of $30.3 per hour worked compared to the euro area average of $49.1.

Although GDP grew 0.91% in 2010, it contracted 1.6% in 2011 and was projected to contract 3.2% in 2012 as a result of higher taxes and public wage cuts introduced under the governments austerity program. Unemployment was expected to rise in coming years and reach 12.5% in 2011, 13.8% in 2012, and 14.2% in 2013, up from 7.6% in 2008, 9.5% in 2009, and 10.8% in 2010.

Since Salazar's time a group of perhaps 40 families who control most of the country's wealth had played a decisive role in the exercise of political power. Their position derived from their control of the economy, ownership of news media, representation in the legislative bodies, and their close connection with top government officials. Consequently, government policy reflected the conservative political, economic, and social views of this group.

The new government that came to power after the Carnation Revolution of 1974 began a wave of nationalizations of banks and large businesses. Because the banks were often holding companies, the government came after a time to own almost all the country's newspapers, insurance companies, hotels, construction companies and many other kinds of businesses, so that its share of the country's gross national product (GNP) amounted to 70 percent.

Political instability dominated the late 1970s and early 1980s as successive governments unsuccessfully tried to tackle Portugal's economic woes. There were numerous reasons behind Portugal's fiscal difficulties, including loss of the colonies, inefficiencies, and civil unrest, but the two most prominent reasons were the unstable nature of Portuguese party politics and an inadequate constitution. In the post-revolution period, the consolidation of political parties became the overriding concern of the elites. Predictably, the formulation of economic strategies and the overhaul of bureaucratic inefficiencies and corruption took a back seat to the consolidation of viable political parties.

Foreign investors expressed reluctance to invest in Portugal. This hesitancy was fueled by the Socialists' promotion of a "workers management" business formula, governmental protection for strikers, nationalization of key industries, and a strong communist influence in the labor unions.

The Portuguese economy experienced boosts when Portugal joined the European Union in 1986 and the European Monetary Union (EMU) in 1999. In subsequent years, however, it suffered from sluggish to negative growth, a ballooning budget deficit, and low productivity and competitiveness, which, exacerbated by the onset of the eurozone debt crisis, have led to record-high spreads on sovereign debt, downgrades in credit ratings, and mounting pressure to seek an EU or IMF bailout. On May 3, 2011, Portugals Socialist caretaker government reached agreement with the European Commission, European Central Bank, and IMF on a 78 billion (approx. $111 billion), 3-year bailout package that will require Portugal to implement comprehensive measures, including privatization of state-owned enterprises and measures to reform its labor market and justice sector. On May 5, 2011, the caretaker government and the troika signed a memorandum of understanding on conditionality for the bailout package. The package was approved by EU and eurozone finance ministers in mid-May.

Portugal's membership in the EU earlier had contributed to stable economic growth, largely through increased trade fostered by Portugals low labor costs and an influx of EU funds for infrastructure improvements. Portugal's subsequent entry into the EMU brought exchange rate stability, lower inflation, and lower interest rates. Falling interest rates, in turn, lowered the cost of public debt and helped the country achieve its fiscal targets. Until 2001, average annual growth rates consistently exceeded those of the EU average. However, a dramatic increase in private sector loans led to a serious external imbalance, with large capital account deficits that year.

The Government of Portugal managed to keep the budget deficit under 3% in accordance with the eurozone's Stability and Growth Pact during 2002-2004. However, in 2005 Portugals budget deficit surged to a high of 5.9%. Subsequently, the Socrates government undertook efforts to bring the budget situation under control. In 2006, the government reduced the deficit to 4.1%, mainly through revenue-generating measures, including increased collection enforcement and higher taxes. The 2007 budget further reduced the deficit to 3.1% of GDP, through spending cuts and structural reforms. In 2009, however, the budget deficit soared to 10.1% of GDP as a result of a more than 11% drop in tax revenue. Portugals public debt reached 93% of GDP in 2010, with a projected increase to 97.3% of GDP in 2011.

Helped in part by a wider EU recovery, the Portuguese economy grew by 2.74% in 2007, up from 1.4% the previous year. But a slowing regional economy saw the Portuguese economy contract by 0.35% in 2008, short of predictions, and contract by 2.1% in 2009. The economy picked up in 2010 with annualized GDP growth of 0.91%, but is expected to contract 2% in 2011 as a result of higher taxes and public wage cuts introduced under the governments austerity program.

Unemployment was 10.8% in 2010, up from 9.5% in 2009 and 7.6% in 2008. In the fourth quarter of 2010, unemployment reached 11.1%, up 1% from the same quarter of 2009 and up 0.2% from the previous quarter. The number of unemployed was estimated at 619,000, up 9.9% from the same quarter of 2009 and up 1.6% from the previous quarter.

The service sector, which includes public service, wholesale and retail trade, tourism, real estate, and banking and finance, is now Portugal's largest employer, having overtaken the traditionally predominant manufacturing and agriculture sectors since the country joined the EU in 1986. EU expansion into Eastern Europe has negated Portugal's historically competitive advantage of relatively low labor costs, particularly in the manufacturing and agriculture sectors. Under the leadership of Socialist Prime Minister Jose Socrates (currently caretaker prime minister), who was reelected in September 2009 on a platform of modernization and innovation, the government has been working to change Portugal's economic development model from one based on public consumption and public investment to one focused on exports, private investment, and development of the high-tech sector.

Due to weak economic growth, Portugal has lost ground relative to the rest of the EU since 2002. Portugal's 2009 per capita GDP stood at 80 Purchasing Power Standards (PPS) compared to the EU-27 average of 100 PPS, leaving the country in last place among its Western European counterparts after accounting for price differences (but ahead of EUs newest members). Now among the weaker economies in the EU, and the third eurozone member (after Greece and Ireland) to request a bailout, Portugal aims to reduce its budget deficit to 5.9% (from 9.1%) of GDP in 2011, 4.5% in 2012, and 3% in 2013. In accordance with the terms of its bailout agreement, Portugal has until 2014 to bring its budget deficit back below the mandated 3% eurozone limit. In 2010, the government implemented a series of austerity measures, including cutting public sector wages, reducing attrition replacement hiring, decreasing pension benefits for early government retirement, and increasing taxes. It seeks to impose fiscal discipline and further reduce its deficit over the next 3 years through structural reform measures, as agreed upon with the EU and IMF.

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