In 2009, Portuguese GDP fell by 2.6%, a deep recession but nonetheless milder than in the euro area as a whole. Helped inter alia by the absence of a real estate bubble in the years preceding the crisis and low exposure to toxic assets, the financial sector has remained sound. However, growth prospects remain weak. Growth resumed in 2010 but it is set to remain sluggish in the medium run, as already weak potential growth is likely to have been hit by the global crisis. Portugal has not escaped recent financial market turbulence: debt has been downgraded and spreads have widened, putting at risk the recovery if the situation were to worsen. Against this backdrop, the immediate challenge is to restore investor confidence by rapidly consolidating public finances. The next challenge is to narrow macroeconomic imbalances, which is a necessary condition for a sustained reduction of the large external deficit, notably through improved competitiveness. Finally, Portugal needs to resume its convergence towards higher income-level countries. It stopped catching up from the early 2000s onwards and needs to nurture stronger potential growth. This will help to restore fiscal sustainability over the long run.