2008 OECD Economic Surveys: Portugal 2008

image of OECD Economic Surveys: Portugal 2008

OECD's periodic review of the Portuguese economy. This 2008 edition focuses on several key challenges including securing fiscal consolidation, maximising the gains from integration into the world economy, and improving the functioning of the labour market.

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Assessment and recommendations

Over the past two decades, spurred by EU membership, Portugal has undertaken a wide range of reforms to liberalise the economy and open it to foreign trade and investment. These reforms paid off in terms of GDP growth and Portugal managed a significant catch up towards the living standards of more affluent OECD economies until the early 2000s. Thereafter, growth stalled, unemployment increased substantially, and the convergence process suffered a reversal, and it was not until 2005 that economic growth picked up again, thanks in part to a renewed effort at macroeconomic and structural reforms. A forceful fiscal consolidation brought the deficit down from more than 6% of GDP in 2005 to 2.6% in 2007, and inflation moderated to about 2½ per cent, just above the euro average. The on-going structural reforms, if fully implemented, will contribute to raising potential growth in the future; but the short-term outlook remains worrisome, as the external environment is not expected to be as benign as in recent years. The downturn in the United States, tighter credit market conditions internationally and risks of negative spillover effects in Europe imply that Portugal will face weaker foreign demand in 2008. This is likely to slow its exports and overall expansion. Looking ahead, potential growth, estimated at around 1½ per cent, is too low to narrow the income gap with richer OECD countries. Securing fiscal consolidation provides a solid base for deepening and broadening structural reforms and encourages the necessary adjustments to put the economy on a higher growth path.

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