According to the European commission, the continuing debt crisis within the euro zone, especially within Spain could negatively affect Portugal’s economic outlook. In addition the Portuguese government’s decision to increase taxes in order to hit fiscal targets could prove to be another negative factor.
The European commission is still anticipating a 3% decline in GDP this year followed by a decline of 1% in 2013, although some economists feel this prediction may be too optimistic.
The Commission expects to seek modest growth in the economy of just 0.8% in 2014. Although these predictions are the same as in September, following the review of the €78 billion bailout, it’s still much worse than originally anticipated in spring, as the commission predicted a slow recovery next year.
The reason for this much gloomier prediction is due to the continuing regional debt crisis, and the possibility that Spain’s situation could affect Portugal’s trade outlook. In addition the commission feels that although the tax hikes could lead to extra revenue, this could backfire if domestic demand shrinks more than predicted. In October the government presented its budget for next year which included the largest tax increases ever seen in the modern history of Portugal.
The commission thinks domestic demand will fall by 7.1% this year, and by 2.5% next year. In spite of this the government in Portugal is adamant that raising taxes is the only way it can meet its deficits. It is also looking at further spending cuts into next year and 2014 equating to 1.75% of GDP.