Economic Survey of Portugal 2006
"Following a period of convergence to EU average living standards, the catching-up process has stalled since 2000. Real GDP growth averaged less than 1% between 2000 and 2005 and the on-going recovery remains fragile, with annual growth expected to remain below 2% in 2006 07. Slow growth in this decade reflects both cyclical and structural weaknesses which are mutually reinforcing. The accumulated output gap since the beginning of the slowdown is among the largest in the euro area and potential output growth is estimated to be currently about half what it was in the second half of the 1990s. Trend productivity growth in the business sector which, at 3% per year, was above average until the late 1990s has fallen to around 1% in 2004 05, constrained by the protracted period of low productive investment. Portugal’s export performance has deteriorated in a global environment where competition has become harsher. Major new players in world trade with lower labour costs are competing in Portugal's traditional product markets, while new EU members are increasingly specializing in the medium- and higher-technology products, where Portugal is also developing. Thus, Portugal did not take full advantage of the opportunities created by membership in the EU and the euro area to enhance growth on a sustainable basis. Losses in export market shares have been aggravated by the appreciation of the real exchange rate (as measured by Portuguese unit labour costs relative to those in its trading partners), while a real depreciation through greater wage restraint could have been expected (and would have been desirable) in a period of large slack in demand. As a result of economic weakness and lax policies in the past, the fiscal deficit reached close to 6% of GDP in 2005, an unsustainably high level."