Contents MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHAIRMAN OF THE EXECUTIVE COMMITTEE 5

Contents MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHAIRMAN OF THE EXECUTIVE COMMITTEE 5 Distribution Networks of Banif Financial Group 8 Banif Financial Group Holdings Diagram at 31-12-2011 9 01. ECONOMIC BACKGROUND 10 1. INTERNATIONAL SITUATION 11 2. DEVELOPMENTS IN THE WORLD'S MAIN ECONOMIES 12 3. THE PORTUGUESE ECONOMY 18 3.1 Supply and Demand 18 3.2 Prices 23 3.3 Borrowing Requirements 24 3.4 Budgetary Policy 24 4. THE FINANCIAL SYSTEM 25 4.1 Global Situation 25 4.2 Retail and Corporate Markets 26 4.3 Money and Foreign Exchange Markets 26 4.4 Bond Market 27 4.5 Stock Market 29 02. BANIF - BANCO INTERNACIONAL DO FUNCHAL, SA BUSINESS IN 2010 31 1. BUSINESS IN THE AUTONOMOUS REGION OF MADEIRA 32 2. BUSINESS IN THE AUTONOMOUS REGION OF THE AZORES 33 3. BUSINESS IN MAINLAND PORTUGAL 34 3.1 Business in the Corporate and Medium-to-High Income Segment 34 3.2 Business in the Retail Segment 36 4. NEW DISTRIBUTION AND BUSINESS SUPPORT CHANNELS 38 4.1 Call Centre and Electronic Banking Business 38 4.2 Agency Channels 40 4.3 Electronic Channels and Payment Means 41 4.4 Protocols and Cross-Selling 41 4.5 Strategic Marketing 42 2

5. LENDING AND SAVINGS PRODUCTS 45 5.1 Mortgage Lending 45 5.2 Consumer Credit 46 5.3 Specialised Credit - Small Business Loans 47 5.4 Deposit Accounts and Savings Products 48 6. RECOVERY OF OVERDUE CREDIT AND LOANS SUBJECT TO LITIGATION 49 7. FINANCIAL ACTIVITY 51 8. INTERNATIONAL OPERATIONS 53 9. IMAGE AND COMMUNICATION 55 10. HUMAN RESOURCES 58 11. OPERATIONAL INFRASTRUCTURE AND TECHNOLOGY 60 12. MANAGEMENT OF BUSINESS RISKS 63 12.1 Credit Risk 65 12.2 Market Risk 74 12.3 Liquidity Risk 77 12.4 Operating Risk 79 12.5 Other Risks 80 13. COMPLIANCE 80 14. AUDIT 83 15. CLIENT OMBUDSMAN 85 03. ANALYSIS OF ACCOUNTS 86 04. DISTRIBUTION OF RESULTS 94 05. CLOSING REMARKS 96 06. FINANCIAL STATEMENTS 101 1. BALANCE SHEET 102 2. INCOME STATEMENT 104 3. STATEMENT OF COMPREHENSIVE INCOME 105 4. STATEMENT OF CHANGES IN EQUITY 106 5. CASH FLOW STATEMENT 107 6. NOTES TO THE FINANCIAL STATEMENTS 109 3

07. PRO FORMA BALANCE SHEET AND INCOME STATEMENT, BASED ON AN IAS/IFRS BASIS 190 08. ADDITIONAL DISCLOSURES 194 1. DISCLOSURE REQUIRED UNDER ARTICLE 447 OF THE COMMERCIAL COMPANIES CODE 195 2. INFORMATION WITHIN THE TERMS OF ART. 448 OF THE COMPANIES CODE 227 3. OWN SHARES AND QUALIFIED SHAREHOLDINGS 227 09. FSF AND CEBS RECOMMENDATIONS ON TRANSPARENCY OF INFORMATION AND ASSETS VALUATION 228 10. CORPORATE GOVERNANCE REPORT 234 1. CORPORATE GOVERNANCE: STRUCTURE AND PRACTICES 235 2. REMUNERATIONS 258 ANNEXES 273 4

Message from the Chairman of the Board of Directors and the Chairman of the Executive Committee For most of the world's economies, and the so-called emerging economies in particular, 2010 represented the start of the process of recovery from the deep recession of 2008 and 2009. In Portugal however, this recovery was severely compromised by the emergence of the sovereign debt crisis and the consequent need to implement processes of budgetary consolidation and reduction of private sector indebtedness. Thus in 2010, companies and private individuals continued to experience severe economic difficulties, specifically as a consequence of restrictions on access to credit, the high cost of financial resources, worsening unemployment and the substantial increase in the tax burden. The financial sector remained particularly unstable and the interbank money market continued to be inaccessible to Portuguese banks in general. This obliged credit institutions to turn to the European Central Bank to meet a substantial proportion of their borrowing requirements, while compelling them to beef up their equity and manage their liquidity carefully. In line with the whole of the Portuguese banking system and as was seen in the previous year, in 2010 Banif felt the impact of its clients' difficulties. This was reflected in the large number of defaults, which resulted in the creation of 85.6 million euros of provisions/impairment, an amount just 12.1% below the substantial figure shown for this heading in 2009. 1 Despite this difficult economic environment, Banif managed to improve its main financial indicators over the course of 2010, namely net assets (+7.4%, to 12,401.2 million euros), net interest margin (+0.2%, to 231.8 million euros), banking product (+0.8%, to 327.3 million euros) and cash flow (+6.4%, to 141.6 million euros). These figures, along with a slight decrease in provisioning, enabled the company to achieve a result for the year of 35.1 million euros, which represents an increase of 23.1% on the previous year (all figures on an IAS/IFRS basis). The arc of Banif's development was not restricted to positive progress in terms of its main financial indicators. Albeit in a moderate fashion in keeping with the prevailing conditions, the Bank remained committed to growing its distribution network, and so responding to the 1 All figures on an IAS/IF RS basis. 5

substantial increase in its client base achieved thanks to the ambitious recruitment campaigns undertaken in recent years. Thus the number of bank branches increased from 351 at the end of 2009 to 360 at the end of 2010. This process was followed through in accordance with strict criteria of economic rationality, prioritising high-potential sites and opting for smaller branches with more flexible and less onerous structures. The same criteria of economic rationality and the same desire to meet our clients' needs also underpinned the major projects undertaken at the level of the Bank's central services. Notable among these were introducing on-line broking via the electronic banking system, joining the direct debits system (SEPA), implementing the integrated electronic statement, rationalising debit/credit notes, the Note Recirculation Project, reengineering the archive management process, the Bank of Portugal Credit Liabilities Centre's new information system, the launch of the RP tool to gauge the productivity and profitability of business units, and improvements to the overdue credit recovery structure. Thanks to these developments, Banif has gained recognition for the quality of its products and services in a variety of ways: the large number of quality certification processes now completed; the extremely positive results of independent mystery calls and mystery shopping surveys, where the Bank was again ranked 1st and 4th in the Portuguese market; and the positive evolution of customer satisfaction indicators obtained by way of the survey conducted in 2010. Also in 2010, Banif carried out its biggest ever increase in share capital, in the amount of 214 million euros to a total of 780 million euros, entirely subscribed to and paid up by Banif Comercial, SGPS, SA. This operation, together with the results of the Bank's business itself, led to a significant increase in its equity (32.2%, to 924.3 million euros), giving a Tier 1 capital ratio of 10.76% and a total capital ratio of 14.54%. These levels, which are clearly higher than the banking system average, comply with the Bank of Portugal's recommendations and are appropriate to meeting the capital requirements of the Bank's business. 2010 will also remain in our memory as the year of the death of Banif Financial Group founder and chairman of the board of directors, Comendador Horácio da Silva Roque. Continuing this project, with total respect for the values and principles of its founder, is a commitment incumbent on all of us and the most authentic method of perpetuating the tribute that Comendador Horácio da Silva Roque deserves of us. Banif has shown itself to be up to the task of meeting such important responsibilities. The Bank made a significant contribution to the Group's results, carried out its biggest ever share capital increase, defined strategies and steps to meet the challenges of the current economic 6

situation, rationalised costs, optimised structures and increased its levels of rigour and efficiency. We are proud of the road that has brought us this far. We are determined and sure of the path we wish to follow. We believe in the confidence of our clients and the quality of our colleagues to ensure the success of this project, which belongs to everyone. Chairman of the Executive Committee Carlos David Duarte de Almeida Chairman of the Board of Directors Joaquim Filipe Marques dos Santos 7

Distribution Networks of Banif Financial Group Service points as at 31 December 2010 MAINLAND MADEIRA AZORES ABROAD TOTAL BANIF Comercial 333 45 57 184 619 1. BANIF 311 43 55 8 417 Branches 276 38 46 0 360 Business Centres 20 1 4 0 25 Institutional Clients Centres 0 0 1 0 1 BANIF Privado 14 1 1 0 16 Call Centre 1 0 0 0 1 Offshore Office 0 2 1 0 3 Home Loan Shops 0 1 1 0 2 Representative Offices/Others 0 0 1 8 9 2. BANIF GO 1 1 0 0 2 3. TECNICRÉDITO, SGPS 19 1 2 13 35 BANCO BANIF MAIS 17 1 2 4 24 Others 2 0 0 9 11 4. Banif - Banco Internacional do Funchal (Brasil) 0 0 0 26 26 Branches 0 0 0 13 13 BANIF Financeira 0 0 0 12 12 Others 0 0 0 1 1 5. BANIF BANK (Malta) 0 0 0 8 8 6. Banco Caboverdiano de Negócios 0 0 0 21 21 7. Banca Pueyo (Spain)* 0 0 0 88 88 8. Bankpime (Spain)* 0 0 0 19 19 9. Others 2 0 0 1 3 BANIF Investimentos 7 1 1 15 24 1. BANIF Cayman 0 0 0 1 1 2. BANIF International Bank 0 0 0 1 1 3. BANIF Banco de Investimento 2 1 1 0 4 4. BANIF Banco de Investimento (Brasil) 0 0 0 5 5 5. Others 5 0 0 8 13 Insurance 40 7 18 0 65 1. CSA/GLOBAL 40 7 18 0 65 Branch Offices 40 1 18 0 59 Others 0 6 0 0 6 TOTAL 380 53 76 199 708 * Consolidated using the equity method 8

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01 Economic Background 1. INTERNATIONAL SITUATION After the severe global recession of 2008/2009, the world economy began to recover in the second half of 2009, and that recovery continued in 2010. According to the IMF 1, the global economy experienced growth of approximately 5% in 2010, recovering from a global recession characterised by shrinking product in real terms in 2009 (-0.6%). It has been a feature of the current phase of recovery that it has proceeded at two speeds: growth in the advanced economies, while better than initially expected, has been more moderate and unemployment has stayed high, while in emerging markets economic activity remains robust and signs of inflation, apparently symptoms of overheating, are beginning to emerge. Global performance was led by the emerging and developing economies, which together are estimated to have recorded growth of 7.1%. Of particular note was the performance of the Chinese, Indian and Brazilian economies, which grew by 10.3%, 9.7% and 7.5%, respectively. Recovery extended also to the developed economies, notwithstanding the fact that, at 3%, their growth was slower. The U.S. economy grew by 2.8% and that of Japan by 4.3%, its highest rate since 1990, while the countries of the euro zone saw growth of 1.8%. Among the latter, the performance of the German economy was of particular note: with growth of 3.6%, Germany was the driver of the eurozone as a whole. As far as prices are concerned, again there were two distinct patterns. In the developed economies the considerable economic capacity still idle and well anchored inflation expectations contributed to a moderate increase in consumer prices of approximately 1.5%. In the emerging and developing countries, strong economic growth and higher food prices, which persisted throughout the year, began to have an impact on consumer prices, which rose by 6.3%. 2010 also saw a recovery in world trade. The volume of goods and services traded expanded by approximately 12% in 2010, after a sharp contraction of 10.7% in 2009. Commodities prices also recovered strongly: the price of oil rose 27.8% in average terms in 2010 and prices for non-oil commodities went up 23% on average, compared with falls of 36.3% and 18.7%, respectively, in 2009. 1 IMF, World Economic Outlook Update, January 2011 11

2. DEVELOPMENTS IN THE WORLD'S MAIN ECONOMIES In the U.S. economy, the recovery that began in mid-2009 gained strength over the course of 2010, despite the fact that unemployment is still high. The most recent data indicate real growth of 2.8% in 2010, after a decline of 2.6% in 2009. The initial phase of recovery, between the second half of 2009 and the first half of 2010, was to a large extent due to stabilisation of the financial system, the expansionary effects of monetary and fiscal policy and a strong increase in output as companies replenished inventory. The sustainability of the recovery began to be called into question in mid-2010, as many of those effects began to disappear and budgetary and banking problems in Europe cast a shadow over the financial markets. Nevertheless, the recovery in economic activity stabilised in the third quarter of 2010, supported by an increase in private consumption, corporate investment and public expenditure, along with a continuing strong contribution from inventory accumulation, which is thought to have accounted for more than half the increase in GDP in that quarter. Net external demand and the weakness of investment in housing, as state programmes to support the sector came to an end, had a negative impact on growth. As a consequence, the construction sector remains weak, reflecting an excess of void homes and negative fundamentals for commercial real estate. There was a very moderate recovery in the labour market. Compared with the almost nine million jobs destroyed in the private sector during the recession between 2008 and 2009, only a little over one million were created in 2010, a gain insufficient to accommodate new participants in the labour market and therefore too small to reduce the size of the idle work force. On the other hand, the 12

persistence of this stock of idle labour made it possible to contain pressure on prices: inflation has run at between 1.1% and 1.2% since June 2010. Excluding the volatile food and energy components, inflation stood at 0.7%, recovering from the record low seen in October. In this context the Federal Reserve, which has kept interest rates in a range between 0 and 0.25% since December 2008, has had in the last two years to resort to alternative monetary policy measures, namely programmes to purchase long-term debt securities in the market (a policy commonly referred to as quantitative easing). In November the Fed announced a second programme, consisting of the purchase of up to 600 billion dollars of public debt over a period of eight months. The Asian continent went into the global crisis in good shape and continued to lead growth during the recovery phase, thanks in large part to resilient domestic demand that made up for the crisis's negative impact on external demand. Industrial production and retail sales were strong in China and in India and robust activity in these countries had a positive knock-on effect on the rest of Asia. In truth, China's strong and sustained growth in recent years has propped up global trade, benefiting exporters of raw materials (for example Australia, New Zealand and Indonesia) and of capital goods (such as Germany, Japan, South Korea and Singapore, among others). In contrast to the pattern during previous recoveries, domestic demand was driven by the return of private capital flows, reflecting the reopening of these economies to external finance. In the short term, significant differences in the economic performance of these countries persist, related to the scale of stimuli and domestic demand, as well as economic and financial conditions and underlying risks. In China, real GDP grew by 10.3% in 2010, with retail sales and industrial production confirming that domestic demand managed to expand beyond government stimuli. However, the second half of the year marked a significant deceleration compared with the growth seen in the first few months. That deceleration continued throughout 2011, by virtue of the imposition of stricter limits on credit growth, measures to cool the real estate market and the planned removal of fiscal stimuli over the course of the year. In India, macroeconomic performance has been vigorous, with the most recent data on industrial output at the highest levels seen in the last two years. The economy is estimated to have grown by 9.7% in 2010, chiefly driven by domestic demand, with investment stimulated by large corporate profits and external finance on favourable terms. However, the contribution of net exports should turn negative in 2011, in so far as the strong increase in investment will result in an increase in imports. The high rate of growth in the domestic economy was reflected in a rapid increase in inflation (13.2% in 2010), prompting the central bank to raise the reference rate by 125 basis points. 13

In Japan, the export-led recovery that began in the second quarter of 2009 gained strength over the course of 2010, thanks to the better-than-expected recovery in the advanced economies and increased demand from China for capital goods. Thus the economy recorded its highest annual growth rate since the beginning of the 1990s: real GDP increased by 4.3% in 2010. However, appreciation of the yen (above all at times of high volatility and increased risk aversion, when the yen serves as a safe haven asset for investors) could have an impact on exports and this, combined with the removal of fiscal stimuli and the weakness of the labour market, is likely to restrict economic growth in the short term. The main challenges for Asia have to do with rebalancing the drivers of growth, with greater efforts to encourage reliance on domestic sources as opposed to external demand. This rebalancing is critical in China, where it involves increasing the part played by family consumption in domestic growth. The steady appreciation of the renmimbi, thanks to the accumulation of large external reserves of foreign currency in recent years, should contribute to this rebalancing. Latin America is emerging from the financial crisis more rapidly than anticipated, reflecting sound macroeconomic fundamentals, appropriate support from monetary and budgetary policies, favourable terms of external finance and strong revenues from raw material exports. The surpluses generated by those exports potentiated domestic product growth and this, combined with favourable borrowing terms, supported domestic demand. For many of these countries, the potential negative impact of weaker demand for imports among the developed economies could be relatively minor, given their lesser dependency on external trade and their greater reliance on exports of raw materials, external demand for which should remain robust. Growth in the region is estimated to have been 5.9% in 2010. After a brief interregnum during the most acute moments of the global crisis of 2008, the five main economies of Latin America are experiencing a resurgence in capital inflows. Strong capital inflows have mixed effects. On the one hand they have been a source of cheap and widely available finance to expand domestic demand. But, on the other, they have increased concerns about overheating, external competitiveness (given the significant appreciation of the corresponding currencies), rising sterilisation costs (given the significant interest rate differentials compared with external rates) and the creation of speculative bubbles in the financial markets. The Brazilian economy is estimated to have grown by 7.5% in 2010, the biggest increase in recent decades. Growth was underpinned to a large extent by domestic demand, in particular private consumption and investment. Nevertheless, this internal dynamic prompted strong growth in imports which more than offset the increase in exports, which benefited from the favourable context of demand for raw materials but were hit by appreciation of the real. That exchange rate effect, which derived from the substantial inflow of capital (reserves amounted to 294 billion dollars in December, equivalent to more than one year of imports), favoured imports and damaged 14

exports: the current account deficit stood at 48 billion dollars at the end of 2010 (3.8% of GDP). To counter this effect, the government decided to increase the tax on financial operations (Portuguese abbreviation - IOF), which is designed to tax short-term capital entering the Brazilian economy, from 2% to 6%, during the second half of the year. For its part, inflation hit a five-year high of 5.91% in December, driven to a large degree by the increase in food costs and raw materials prices, in a context of increasing pressure from domestic demand fed by credit growth. In Europe, economic recovery has been troubled above all by the emergence of the sovereign debt crisis. Economic activity has been expanding at a moderate rate since mid-2009, after approximately five consecutive quarters of decline, and has been patchy. The eurozone is thought to have grown by 1.8% in 2010, while the developing economies of central and eastern Europe are estimated to have seen growth of approximately 4.2%. Even among the eurozone countries there are marked differences in economic performance, attributable to a large extent to the state of public and private sector balances and to whether or not fiscal policy can be used to support recovery. In Germany, economic activity in 2010 proved more dynamic than expected, after the period of adjustment and moderate growth seen in the period preceding the recession and the sharp decline of 2009. Real growth was 3.6% and was largely due to domestic demand, with a major increase in investment. In parallel, external demand also made a positive contribution to growth, with exports and imports growing 8.2% and 7.0%, respectively, in the second quarter. The main quantitative indicators relating to industrial output and orders showed signs of a strong dynamic, chiefly in respect of intermediate goods, investment goods and durable consumer goods. As far as qualitative indicators were concerned, namely business and consumer confidence, these can be seen to have reached their highest levels for two decades, both in terms of the components that assess the current situation and those that rate future expectations. Private consumption remains weak however, with retail sales increasing 0.6% to October, aided nonetheless by positive progress in the realm of employment, in a context of measures to support job creation implemented by the German government. The unemployment rate eased from a peak of 7.7% in June 2009 to approximately 7.5% at the end of 2010. 15

In France, economic activity came back in 2010 from the severe recession experienced in 2009, recovering from a 2.5% fall in product to growth of 1.6%. This recovery was attributable to the dynamic of domestic demand: the increase in stocks primarily, but also in private consumption and GFCF. In contrast, the contribution of net exports was negative, although the lagging effects of euro depreciation may help to stimulate exports in part. In the United Kingdom, economic recovery began only in the last quarter of 2009, and then only in a relatively moderate fashion. The dynamic of domestic demand, including the variation in stocks, was responsible for the recovery, as net exports made a negative contribution to economic growth. Private consumption is thought to have made a higher contribution in the final quarter of the year, as consumption was brought forward ahead of the heralded increase in VAT in January 2011. However, the economic recovery that is under way has been threatened by the sovereign debt crisis that has affected the countries situated on the periphery of the European Union, and in particular Greece, Ireland, Portugal and Spain. This crisis has had a direct impact on these countries in two ways: (i) by way of the early removal and reversal of budgetary and fiscal stimulus measures that had been implemented with the aim of encouraging domestic demand in the various economies, following the response to the international financial crisis; (ii) by way of the difficulties that states and the banking sector alike have experienced in accessing finance, a situation that undermines confidence in the financial system and threatens its stability, while imposing a significant financial cost on domestic economic agents. The crisis began at the end of 2009, when the recently appointed government of Greece republished data on the budgetary situation showing a deficit much higher than expected. This was then revised upwards on successive occasions, generating widespread mistrust in the financial markets as to the true state of that country's public accounts. Concomitantly, ratings 16

agencies downgraded Greek debt to the speculative grade, further eroding investor confidence and prompting interest rate spreads on the public debt of eurozone countries against Germany to widen to their maximum levels since the beginning of Economic and Monetary Union (EMU). At the beginning of May, these spreads reached 962 basis points for Greece and over 300 basis points for Portugal and Ireland. In this context, the authorities announced various measures, including plans for budgetary consolidation on the part of the governments of the countries most affected and, on 2 May, a joint European Union (EU) and IMF plan worth 110 billion euros to support Greece. Nevertheless, the situation continued to worsen for the most vulnerable countries, with markets considering that the set of measures announced was insufficient. This led to an unprecedented response from the European authorities, on 9 and 10 May, with the creation of a European stabilisation fund, designed on the one hand to solve the borrowing problems of countries having difficulty accessing the market and, on the other, to break the vicious circle that developed in the eurozone between the borrowing of sovereign countries and the corresponding banking systems. The fund amounts to 750 billion euros and includes the participation of the IMF (up to 250 billion euros). The EU created the European Financial Stabilisation Facility (EFSF), which contributed 440 billion euros to the fund, raised by issuing bonds. The European Financial Stabilisation Mechanism (EFSM), a mechanism that already existed, contributed 60 billion euros to the fund. In September, the three main ratings agencies gave the EFSF the highest possible rating. Nevertheless, turbulence continued. Spreads on Irish debt against Germany reached more than 600 basis points in November. In response to pressure from the financial markets on the financial stability of the eurozone, the Eurogroup and Ecofin decided unanimously to grant Ireland financial assistance, on 28 November, following a request for help from the Irish authorities on 21 November. The rescue package will cover budgetary borrowing requirements of up to 50 billion euros and provide p to 35 billion euros for the banking system. Of this amount 22.5 billion are from the IMF and the EFSM and 17.7 billion from the EFSF. The EU contribution also includes bilateral loans from Denmark, Sweden and the United Kingdom worth 4.8 billion. The funding ratio between the EU and the IMF is 2:1. Also on 28 November, the eurozone countries decided to implement a permanent financial stabilisation mechanism, to ensure a replacement for the EFSF when it expires in June 2013. In parallel, the ECB announced a series of measures designed to restore liquidity to the various market segments and mitigate potential systemic risks, among them the Securities Market Program (SMP), which consisted of a sterilised programme to buy eurozone public and private debt securities. Other measures consisted of reintroducing measures taken previously that had been suspended, including expansion of longer-term refinancing operations, reintroduction of the fixedrate auction with total satisfaction of demand, and reestablishment of the Fed currency swap line to supply funds in dollars for eurozone counterparties. 17

Additionally, in July the Committee of European Banking Supervisors conducted stress tests on 92 banking institutions in the eurozone and, with the aim of reinforcing the financial system's ability to resist shocks and rebuilding the balance sheets of financial institutions and the confidence of investors, the Basel Committee announced the Basel III reforms, which place stricter capital requirements on financial institutions. The reforms include implementation of two capital buffers: one, dubbed the conservation buffer, designed in the first place to absorb losses arising from adverse shocks, and the other cyclical, defined in each country, with the aim of protecting the banking system from periods of excessive credit growth. A non-risk adjusted leverage ratio is also established, and institutions of systemic relevance will be subject to additional rules. The Basel Committee has defined a period of gradual transition to the new rules by 31 December 2018. 3. THE PORTUGUESE ECONOMY 3.1 Supply and Demand According to the INE (National Statistics Institute), Portugal recorded growth of 1.4% in 2010, after a fall of 2.5% in 2009. The differential between the GDP growth rates of Portugal and of the eurozone remained negative, as it had been in every year of the past decade but 2009. The growth observed was not however enough to reverse the situation in the labour market. The unemployment rate rose by 1 p.p. in the fourth quarter of 2010, versus the year-earlier period, reaching 11.1%. The unemployed population swelled to 619,000 individuals (an increase of 9.9% on the year-earlier period). 18

The overall resumption of growth in Portugal in 2010 concealed distinct dynamics within external and domestic demand. On the one hand, it was based on strong exports, in a context of increased trade flows worldwide. On the other, notwithstanding the recovery in private consumption, which returned to growth ahead of GDP and the eurozone average, the increase in domestic demand was modest. Of particular note was the weak performance of investment, which fell by approximately 5% in 2010, although this was a slower decline than was seen in the previous year. After a decade characterised by very modest economic growth, as reflected in the persistence of low potential product growth, the drop in GDP in 2009 was less sharp than in the generality of advanced economies. Among factors that contributed to greater GDP smoothing in this period, it is worth noting the Portuguese financial system's resistance to the repercussions of the global crisis and the fact that the Portuguese economy had not seen an overvaluation of the real estate market. In addition, private consumption in Portugal presented a more stable profile than that of the generality of advanced economies: at the start of 2010 it stood at levels higher than those seen before the emergence of the economic crisis. As regards the other components of expenditure, developments in Portugal were the same overall as seen in the main economies. However, contrary to what was the case in other advanced economies, there was no significant adjustment of the current account deficit during this period. In this context, the evolution of the Portuguese economy over the next few years will be severely restricted by the processes of budgetary consolidation and reduction of private sector, and especially corporate, indebtedness. In particular, the difference between the dynamics of domestic and external demand will become more pronounced, with exports remaining the most vigorous component of global demand. The main economic indicators support this understanding, with the Industrial Turnover Index revealing a contrast between robust growth in the turnover component in the external market and a considerably lower increase in turnover on the domestic market. For its part, disaggregated information from the Services Turnover Index shows more export-oriented services performing strongly, in contrast to services more dependent on the impulses of domestic demand. The greater dynamism of private consumption in 2010 as a whole was underpinned by growth in certain components of disposable income with a high marginal propensity to consume, namely wages and public sector transfers, along with interest rates that remained low. The clear deterioration in the conditions on which banking institutions could access funding on the international financial markets did not cross over in any significant degree to borrowing terms for private individuals, and this too favoured private consumption in 2010. 19

As in 2009, albeit on a lesser scale, real wages rose in 2010 average compensation per employee in the private sector increased by 3.1 per cent in the first seven months relative to the same period in 2009 and the inflation rate was 1.3% in 2010. This increase is smaller however than the estimated increase in average productivity of labour (2.5%). The greater dynamism of private consumption in 2010 is visible in the increase in consumption of consumable and durable goods alike. As regards consumption of consumer goods and services, typically characterised by a smoother intertemporal profile, the Bank of Portugal estimates an increase of 1.1% in 2010, after an increase of 0.5% in 2009. For its part, spending on durable goods should, according to the same source, show an increase of 8.7%, after falling by 14.1% in 2009, in line with this component of private consumption's high degree of sensitivity to the economic cycle. The significant increase in spending on durable goods reflects strong sales of motor vehicles, after the significant falls seen in the previous year associated with the economic recession. This pattern is strongly linked to the fiscal changes introduced in the middle of the year (increase in VAT rates on July 1) and those planned for the 2011 State Budget (a further increase in VAT and duty on petroleum products (ISP) and the end of incentive programmes to encourage scrapping of older vehicles). Both these events prompted consumers to bring forward their purchases. In the last ten years, the trend in motor sales has been downward, resulting in a progressive increase in the average age of vehicles on the road in Portugal, from 7.2 years in 2000 to 10 years in 2009. Public consumption should register an increase in real terms of 3.2% (2.9% in 2009), including the significant impact of the purchase of submarines in the second quarter of the year. 20