Portugal: Recovery still intact

Leading indicators released today remain consistent with a continued slow recovery in H2. Consumer confidence hit the highest level since 2002, after a small increase in October. The economic climate indicator remained unchanged at the highest level since 2008.

Hard data came out on the weak side after stronger readings in recent months. Industrial production decreased 2.6% m/m, implying that industrial production is down by 1.3% compared with a year ago (falling from +3.5% y/y in August).

Retail sales decreased by 2.5% m/m in September, erasing last month’s increase of 2.4%. Compared with a year ago retail sales are up by 2.0%. Monthly hard data are very volatile in Portugal.

We expect GDP to increase 0.9% this year. Portuguese GDP increased 0.3% q/q and 0.9% y/y in Q2. We expect growth to pick up next year and forecast 2015 GDP of 1.8%. In particular, private consumption is set to contribute increasingly to GDP after being a drag over the past couple of years.

The Portuguese economy bottomed in 2013, after experiencing 11 consecutive quarters with negative growth. The unemployment rate is decreasing again and has fallen 3pp since the peak. Employment is also increasing again. Private debt has peaked with household debt, in particular, decreasing rapidly.

The current account deficit has been improved by almost 10% of GDP and the deficit is now gone. After a few of months with negative readings, the current account figure is now back well within positive territory.

Similar to Ireland, Portugal has made a clean exit, achieved a high cash balance and eliminated the current account deficit and has a strong commitment from political leaders. Like Ireland, we expect Portugal to be able to harvest the efforts in the form of a full return to the investment grade universe next year.