Portugal is in the midst of a deep recession as the collapse of external demand and tight financial conditions have affected all parts of the economy, particularly exports and investment. Activity is expected to contract throughout 2009, before recovering very slowly in 2010 as the global economy and financial conditions gradually improve.

Economic activity moderated in the first half of 2008, as investment and export growth softened. In line with the recent intensification of the financial crisis and expectations of a significant slowing in Portugal’s export markets, activity is expected to contract until the second half of 2009, before recovering slowly in 2010. The unemployment rate is set to increase from its already high level. The sizeable negative output gap and lower food and energy prices will reduce inflation.

The expansion has become more broadly based in 2007. Following a period of buoyant export growth, investment is picking up. Growth is expected to strengthen further in 2008 and 2009, largely driven by domestic demand. The still large negative output gap should drive inflation down in 2009. Though gradually declining, unemployment remains high and, as a result, wage increases are set to be moderate.