Statement by the IMF Staff Representative October 14, 2005

The staff report for the 2005 Article IV Consultation on Portugal highlights economic developments and outlook. Private consumption has proven resilient, reflecting low interest rates and lengthening tenors on bank lending, while investment and export growth remained weak. Executive Directors concurred that in an unfavorable context marked by large fiscal and external imbalances, slow growth, and a weak competitive position, the challenge confronting the Portuguese government is to create the conditions to restart Portugal’s per capita income convergence toward the euro area average as soon as possible.

Abstract

The staff report for the 2005 Article IV Consultation on Portugal highlights economic developments and outlook. Private consumption has proven resilient, reflecting low interest rates and lengthening tenors on bank lending, while investment and export growth remained weak. Executive Directors concurred that in an unfavorable context marked by large fiscal and external imbalances, slow growth, and a weak competitive position, the challenge confronting the Portuguese government is to create the conditions to restart Portugal’s per capita income convergence toward the euro area average as soon as possible.

1. This statement provides information that has become available since the issuance of the Staff Report for the 2005 Article IV Consultation. The new information does not change the thrust of the staff appraisal.

2. Short-term indicators are mixed, but give no indication that a sustained recovery is in the works. Consumer confidence posted its fourth consecutive monthly decline in September, although confidence indicators for the manufacturing industry and the services sector were stable (albeit at low levels). Industial production rose a surprising 1.9 percent in August (month-on-month, seasonally adjusted), but the Bank of Portugal’s coincident indicator of economic activity for that month deteriorated slightly.

3. According to preliminary estimates, harmonized consumer prices rose 2.5 percent year-on-year in August. Core inflation, which excludes energy components and fresh unprocessed food products, was 1.8 percent. The gap between the Portuguese and the euro-zone annual inflation rates was 0.3 percentage points in August.

4. Portugal’s governing Socialist party was defeated in countrywide local elections held October 8. The opposition Social Democrats won a majority of municipalities (158) compared to 109 won by the Socialists, and 41 won by other parties. The government has pledged to continue with its reform program despite the setback.