–Adds Comments On Inflation, External Financing Needs, Reforms
PARIS (MNI) – The Portuguese economy is expected to contract this
year under the weight of heavy budget cutting before eking out a modest
recovery in 2012, the Bank of Portugal said in its most recent economic
bulletin published Tuesday.
The central bank predicted the economy would shrink by 1.3% this
year before returning – just barely – to growth, with a rate of 0.6%, in
2012. The expected recession in 2011 would represent a swing of 2.6
percentage points in GDP from estimated 2010 growth of 1.3%.
“This development is marked by the process of adjustment of
accumulated macroeconomic imbalances and, in particular, by a
significant budget consolidation which underlies it,” the central bank
said.
It implied that the economy could end up being harder hit than the
current projections suggest, saying that risks to economic activity were
“strongly” on the downside. Those risks include the possibility of a
weakening in the global recovery, which would hit Portuguese exports, as
well as the potential need for additional budget cutting measures.
“The materialization of these risks would imply a more pronounced
contraction of economic activity than what is currently projected,” the
bank warned.
It also noted that its outlook for public finances included only
budget-cutting measures already approved or “with a high probability of
approval,” in keeping with European Union rules. In particular,
consolidation measures announced by the government on December 15 are
not included, the central bank said.
“In addition, the [fiscal] projections assume that recourse to
Eurosystem [i.e. ECB] refinancing will remain significant throughout the
[forecast] horizon, in a context of the persistent difficulties faced by
Portuguese banks in accessing wholesale market funding,” the bulletin
said.
Even excluding the possibility of additional economic weakness
should downward risks materialize, the central bank paints a pretty
bleak picture for 2011. Both private and public consumption are expected
to shrink after expanding last year. Investment is forecast to decline
by 6.8% after a 5% drop in 2010, while domestic demand is seen dropping
3.6% after a small gain of 0.5% in 2010. Imports are expected to shrink
by nearly 2% after growing 5% last year, while export growth will
decelerate sharply.
Despite the sharp economic slowdown, the country’s harmonized
consumer inflation rate is expected to nearly double in 2011 — to 2.7%
from 1.4% — due primarily to increases in indirect taxes imposed by the
government as part of its deficit-cutting effort. Those increases will
add more than 1 percentage point to HICP inflation this year, the Bank
of Portugal said. Inflation is then expected to return to a lower
trajectory with a rate of 1.4% in 2012.
Given the funding constraints faced by Portuguese banks, a return
to high investment rates will require an increase in domestic savings,
the bank said.
It noted that an expected sharp drop in domestic demand coupled
with continuing growth in foreign demand should reduce Portugal’s
external financing requirement. The country’s current and capital
account deficit is projected to decline from 8.8% last year to 7.1% in
2011 and 7.0% in 2012. At that level, the deficit will still be
“elevated” — a characteristic that has dominated the Portuguese economy
through the last decade, reflecting the imbalance between domestic
savings and investment, the central bank said.
The bulletin also called for “comprehensive and solid” structural
reforms of the Portuguese economy. It said that consolidation of the
budget must ultimately rest on a “substantial change” in the rules
governing the budget process, including the establishment of nominal
caps on public spending. Implementation of such rules will require a
redefinition of priorities, “promoting a rethink of spending and
catalyzing a lengthy discussion of the state’s role in the economy,” the
central bank said.
–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com
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