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Portugal Politics September 2019

Portugal: Costa’s Socialists set to win October’s election, pointing to policy continuity

Portugal is set to hold parliamentary elections on 6 October, testing whether Prime Minister António Costa will be able to strengthen his mandate to govern. While Costa’s Socialist Party (PS) has been surging ahead in the polls and came out on top in the European elections—regarded as a litmus test for the vote—the party’s lead has narrowed in recent polls. Despite the fall, polls still suggest that the PS has a chance at clinching an outright-majority, however, even if fails to do so, it is widely expected that it will be able to form a minority government again. In any case policy continuity is likely ahead, characterized by Costa’s pro-growth, market-friendly reforms; among Costa’s key policies are to balance the budget and lure in more foreign capital.

Costa’s minority socialist government has been praised for delivering a notable turnaround in growth after the Eurozone debt crisis ravaged the economy, while committing to fiscal prudence. More recently, the economy has remained resilient in the face of substantial external headwinds arising from the Eurozone’s broad-based slowdown and a challenging trade backdrop, growing a solid seasonally-adjusted 0.5% quarter-on-quarter in both the first and second quarters of the year. Looking ahead, continuity in economic policy is likely, with the incoming government continuing fiscal consolidation efforts to reign in the declining yet still-hefty debt burden, although an expected slowdown in growth might hinder progress on this front.

Costa has ruled out a formal coalition with far-left parties and would likely instead favor the current arrangement of parliamentary pacts for support to pass legislation. Although, disputes over teachers’ wages have ignited clashes with allies in parliament, that could see them withdraw support this time round. That said, a Spanish-style political impasse is expected to be averted and a government formed fairly swiftly in the likely event that Costa wins. Second in the running is Rui Rio’s center-right Social Democratic Party (PSD), which could attempt to persuade Costa to abandon its alliance with the left and forge a centrist pact.

Commenting on the likely return of Costa’s PS party to power, analysts at Goldman Sachs noted:

“The PS minority government led by PM Costa and supported by leftist parties has proved to be more stable than widely expected. The government’s fiscally prudent strategy focused on“growth friendly consolidation” combined with reforms enacted during the macro-economic adjustment programme has helped the economy to outperform in 2019. With a return of this government, the policy direction would remain constant and thus supportive. Given the tougher external environment, the European Commission lowered its growth forecasts for Portugal to 1.7% of GDP for both 2019 and 2020, from 2.1% in 2018. We broadly agree with this assessment and thus think growth in Portugal will remain above the Euro area average.”

Consensus Forecast panelists expect GDP to expand 1.7% in 2019, which is unchanged from last month’s forecast, and 1.6% in 2020, which is also unchanged from last month’s estimate. Meanwhile, the Bank of Portugal projects the economy will grow 1.7% in 2019 and 1.6% in 2020.

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