Portugal: new challenges for the Costa government 2.0

On October 6 , the Portuguese general elections resulted in a victory of the Socialist Party, which will have to renegotiate with the Left Bloc and PCP-PEV (the Greens and the C ommunists) to form again a coalition government . This victory enables Antonio Costa to strengthen his position by clearly winning the election, which was not the case four years ago ( Chart 1 ). The government’s economic results look quite positive. Portuguese growth is an exception in the e uro area . It is expected to reach 2% in 2019 (versus 2.4% in 2018) while we see euro area growth only at 1.1% ( Chart 2 ). The labour market has improved markedly in Portugal, stimulat ing domestic demand. The unemployment rate fell 5.9 percentage points during the last term. Public finances have also followed a solid trajectory as, even though the public debt ratio remains high (121.5% of GDP in 2018), it has fallen by 7.3 percentage points since 2015. However, structural weaknesses and imbalances persist, which make Portugal vulnerable in the event of a drastic cyclical downturn. The relative political stability is nevertheless an advantage for the country at a time when the international economic environment is becoming markedly more challenging . The credit rating agencies have maintained their positive outlook on the country. DBRS even upgraded the rating to BBB+ on Friday October 4th before even knowing the result of the general elections on Sunday the 6th.