Austerity poster child slides further

As the world waits for a definitive outcome to the Italian election in wishful hope of swift and positive transition back from technocracy, the news from the rest of Europe’s periphery continues to worsen. Overnight the Greek central bank reported that non-performing loans rose to 22.5% at the end of September 2012, up from 16% in Dec 2011, while the economy is expected to shrink yet another 4.5% in 2013 after already shrinking by 20% since 2008.

But as we know it isn’t just mis-performing Greece that continues to struggle. Back in September last year when the Troika one again came out and downgraded the outlook for the Portuguese economy I made comment that even the poster child of austerity was in serious trouble:

So even Portugal, the “poster child” of austerity, is failing in its attempts to meet budget goals imposed under a 78-billion-euro bailout deal. The country has been granted an extra year and targets have been revised down due to the recession that is now engulfing the Eurozone. The Troika now expects a government deficit of 5% this year and 4.5% in 2013, up from 2.5% and 3% respectively.

Portugal’s economy shrank by 1.2% in Q2  and 3.3% yoy, mostly attributed to a decline in internal demand of 7.6% and collapsing investment, down 18.7%. Household consumption fell 6.0% while government spending fell 3.9%. The plan to internally devalue and become export driven is having some success with exports up 4.3% in Q2, but this is nearly half of the growth that came in Q1 and, as the IMF stated above, import growth in euro area trading partners and additional budget consolidation measures are likely to sink this going forward. In other words, everyone is trying the same trick.

Like France, there is now some expectation of growth to return in 2013, but I have no idea why. Possibly on the expectation of some form of global stimulus, although it is may just be a date far enough in the future that people won’t challenge it.

Later in November the Bank of Portugal again downgraded the country’s expected growth for 2013 to -1.6% and just this week the Portuguese Finance Minister admitted that the latest forecast was now double the rate of contraction predicted just 6 months ago:

The Portuguese government on Wednesday said the contraction in economic output this year would be double the government’s initial forecast of one percent of GDP, adding that the administration of Prime Minister Pedro Passos Coelho would seek more time from Brussels to meet its deficit-reduction obligation.

Speaking in parliament, Finance Minister Vítor Gaspar announced a downward revision in the government’s forecast for GDP in the order of one percentage point, explaining that the downturn in the economy at the end of last year would have a negative impact on activity this year. The government’s revised forecast brings it in line with that of the Bank of Portugal, which at the start of this year predicted activity would shrink by 1.9 percent.

Portugal is locked in its deepest recession since the 1970s. GDP shrank 1.8 percent on a quarterly basis in the fourth quarter of 2012 after a contraction of 0.9 percent in the previous three months. The economy has now declined for nine quarters in a row. On a year-on-year basis, the fall in output accelerated to 3.8 percent from 3.5 percent in the third quarter.

So Portugal remains trapped in recession and if those forecast are correct there is at least another 2 years to come. As I noted back in December the Portuguese government has met these disappointing forecasts with yet another round of austerity including:

  • a rise in the standard income tax rate from 24.5% to 28.5%
  • a rise in the top rate from 46.5% to 48%, plus a special 2.5% “social solidarity” tax
  • a lowering of the threshold for the top rate from 153,300 euros (£123,700; $198,200) to 80,000 euros (£65,000; $104,000)
  • an additional 3.5% surcharge on all incomes in 2013

The tax rises are equivalent to more than a month’s wages for most Portuguese workers, and aim to increase government revenues by 30%. Finance Minister Vitor Gaspar conceded that the tax rises were “enormous”, but also called them “another determined step toward recovery”.

Meanwhile, spending is also being cut by 2.7bn euros.

This week Alvaro Santos Pereira, the economic minister, blamed the disappointing forecast on everyone else stating:

“Because Europe is in crisis and many European countries are suffering a recession, and over 70% of Portuguese exports go to Europe, it’s natural that there was a significant impact,”

So no mention of the collapsing internal demand within the country itself, the fact that industrial production is continuing to fall while unemployment rises, or the fact that collapsing export demand is due to the fact that Portugal’s trading partners are attempting the same self-defeating policies in hope that non-euro based demand can pull them out of the hole they continue to dig for themselves.

Portugal is scheduled by the Troika to exit its bailout program in 2014, but with continued disappointment in economic data the revised target of 4.5% deficit this year now looks in doubt. If that does occur you can expect the Troika to do what it always does … Demand more cuts.

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