Portugals recent recessionary trend got started in earnest in the second half of 2002 and the impact will be felt through the remainder of 2003 as households and industries keep major purchases on hold.

With unemployment approaching 7 percent, consumer confidence is low. Interest on unsecured consumer loans dropped below 10 percent this year and mortgage interest rates are near 5 percent.. Nevertheless, consumers are reluctant to commit to major purchases requiring financing. Sales of high-end durables should show no appreciable year-on-year growth during the third quarter of this year and gains during the fourth quarter should linger in the range of 1 to 3 percent.

Sales growth for non-durable and semi-durable goods should also be sluggish through the remainder of this year, with gains unlikely to exceed 2 percent. The long-term growth panorama is not very bright because negative population will begin to erode the size of the consumer base by 2015.

Expenditure on household services rose by nearly 5 percent (year-on-year) during the first half of 2003 but much of that upward movement was linked to the pre-Iraq war surge in oil prices. Service expenditure growth should drop below 4 percent in the third quarter, driven primarily by increased demand for telecommunications services.

Industrial confidence declined sharply during the first half of this year as orders for finished goods dropped off both at home and abroad. As a result, no significant growth in capital expenditure is likely during the second half of this year. Gains in the range of 2 to 4 percent year-on-year should re-emerge during the first half of 2004, but most of the upward momentum will result from increased orders for production equipment.

Demand for industrial inputs is depressed at the moment and will remain so through the third and fourth quarters of this year. Look for intermediate goods orders to rebound early in 2004, showing gains of 3 to 5 percent year-on-year.

Most Portuguese manufacturers are running at well below installed capacity and expansion plans are on hold. Orders for materials and fixtures used in plant construction will not revive...

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