Week ahead 5-9 May: Government is expected to confirm no support of a precautionary programme

WEEK IN REVIEW: Government is expected to confirm no support of a precautionary programme

In Portugal, the Government is expected to confirm that it will leave the current economic and financial assistance programme without the support of a precautionary programme on Monday. The Portuguese Credit and Debt Agency currently holds cash reserves that would amount to the support provided by a precautionary programme. In any case, Portugal will likely remain under close surveillance over the next few years as official lenders want to make sure that public finances are on the right path.

The Documento de Estratégia Orçamental, (DEO) that records the fiscal strategy up to 2018 also gives the details of the measures the Government plans to adopt in 2015. The Government will raise the VAT tax rate by 0.25% to 23.25% and raise the social security rate paid by employees by 0.2%. Moreover the special contribution made by pensioners that is currently temporary (CES) will be replaced by a permanent contribution for pensions over 1000 euros. On the other hand, the Government plans to reduce the cuts that have been applied to public servants salaries by one fifth in 2015.

In the Portuguese-speaking world, Angola has finalised the changes to the private investment law that have reduced the lower bound for investment supported by the state to 500 thousand dollars for national investors but has maintained the minimum level at 1 mn dollars for foreign companies.

In the euro area, the Economic Sentiment Indicator (ESI) decreased slightly in the euro area (by 0.5 points to 102.0), after several months of rises. The slight decrease in sentiment was mainly due to a worsening of confidence in services and construction, which are the two sectors where confidence still scores below its long-term average. In industry and retail trade, sentiment remained virtually unchanged compared to March. Confidence among consumers improved. Amongst the five largest euro area economies the ESI declined in the Netherlands (-1.0), Spain (-1.0) and Germany (-0.4), remained broadly stable in France (-0.3) and increased slightly in Italy (+0.5). In Portugal, the ESI rose slightly to 100.6. The flash estimate for the euro area’s inflation was 0.7%yoy in April. Inflation was less than expected, nevertheless we expect the ECB to remain in a wait-and-see mode until new information is released on activity and prices. Q1 GDP will be released in mid-May. The unemployment rate in March was again 11.8% of the labor force in the euro area. The portuguese rate continued well above at 15.2% in March, although it has declined significantly from 17.4% of the labor force in March 2013.

Elsewhere in the world, US growth has surprised on the downside, almost falling to a halt (0.1%qoq annualised). The most likely reason is the effect from extreme weather conditions in the winter, that led to a sharp decline in stocks. Analysts are also concerned about the slowdown in exports that may be due to the slowdown in China.

WEEK AHEAD

8 May: The ECB will hold its rate setting meeting: we expect no further action for now

9 May: Portuguese Q1 employment and unemployment – the unemployment rate has declined  over the last few quarters to 15.3 in Q4 thanks to the economic recovery and active labour market policies. However, the recovery is not fast enough to justify further significant improvements.