The portuguese economy - Essay Example

The Portuguese Economy Background The Portuguese economy was severely affected by the economic recession and political instability, but due to steady mobilization of the resources it entered a new phase of economic growth. The Portugal is a small economy, and after entering the EU in 1986, it has undertaken a variety of reforms that aim at economic liberalization and greater access to foreign trade and investments (Corkill116). Thus, the country has experienced a prolonged period of economic expansion with an increase in GDP and it has become a diversified service based economy.

Economic System and challenges The economic recession of the 2008 affected the Portugal economy that led to implementation of the economic system that would enable the country to recover. It launched a series of measures to support household income and small and medium sized enterprises. In the framework of the European economy Recovery Plan, Portugal employed stimulus package that included measures of additional state budget of 0.8 percent of GDP and spending of 0.5 GDP (Paul 415). The economic recession led to a series of domestic and external shocks that cause unstable power supply and higher prices for the imported products.

The banking system was unable to implement policies to help the economy to recover the recession shocks. The impact was so intense that the Portugal economy is still having inflation and unstable banking system. For instance, the strict requirements for the bank to increase capital ratios have caused a decrease in credit growth. The purchasing power in Portugal has the decreased due to inflation in the country that makes the products and services expensive for households’ consumptions (Paul 416).

Current economic situation The growth in trade and foreign direct investment has played an essential role in Portugal economy. The most significant industry in Portugal economy is the Pulp and paper industry that produces plastic products, textile. Meanwhile, it has a number of recorded leading industries with excellent image in the global market that includes Sonae the producer of wood and Corticeira that produces Cork (Paul 410). The automobile industry has become the second largest export sector, after textile and clothing.

The trading relations of Portugal are relatively small with United State having a strong trade ties, and the United State export $1 billion worth of goods and approximately $2.1 billion in 2010 ( OECD 24). The Portuguese trade has improved significantly over the last 10 period, but the export and import have reduced. The rate of unemployment has increased from 7.8 percent in 2009 to 9.5 percent in 2010 and is expected to remain above 10 percent during next few years. Meanwhile, the GDP has decreased by 2.

5 percent in 2009 and the economy is expected to slow down until the end of 2012 (OECD 26). The economic crisis has worsened the balance of the economy due to over reliance on consumption and weak growth in labor productivity. The inadequate of wage moderation have led to loss of external competitiveness that led to increase in the fiscal deficit. The government has tried to implement fiscal consolidation programme to reduce the budget deficit to 2.8 percent of GDP by 2013(OECD 24). The program is based on reduction of spending, tax expenditure and addition of the privatization plan.

Hypothesis Portugal is trying to augment tax revenue to cope with the high fiscal deficit and low wages that will promote the global competitiveness. The nation should put public finances on sustainable methods that will help in gaining the global competitiveness. Meanwhile, it can improve tertiary education, training and innovation that will modernize the economy to face global competition. The nation has to face the inflation issues and fluctuation of exchange rate in the foreign market that will dispute the economic development.

Works Cited Corkill, David. The Development of the Portuguese Economy: A Case of Europeanization. New York: Routledge Press, 2009. OECD. OECD Economic Surveys: Portugal 2010. New York: OECD Publishing, 2010. Paul, Justin. Business Environment. United Kingdom: Tata McGraw-Hill Education, 2010.