The Bank of Portugal said GDP was set to contract by 2% this year and 1.8% in 2012 in revised estimates published in its summer economic bulletin on Tuesday.
It had forecast a 1.4 percent fall in GDP in 2011 and a growth of 0.3% the following year before the European Union and International Monetary Fund agreed a 78-billion-euro ($112-billion) debt rescue plan with Lisbon in April.
Portugal came under intense pressure early this month after Moody's slashed its debt rating to junk status, pushing up the price Lisbon has to pay to raise fresh funds and thereby making it even more difficult to stabilise its strained public finances.
Moody's downgraded the credit rating by four notches to Ba2 from Baa1, warning it could be lowered further.
The action, it said, was also based on increased concerns Lisbon would not meet deficit reduction and debt stabilisation targets agreed with the EU and IMF due to the “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.” - Sapa-AFP