Bloomberg News

Bank of Portugal Forecasts Deeper Economic Contraction in 2012

October 06, 2011

Oct. 6 (Bloomberg) -- Portugal’s economy will contract more than previously forecast in 2012 as export growth slows and private consumption drops, the central bank said.

Gross domestic product will shrink 1.9 percent this year and 2.2 percent in 2012 after expanding 1.4 percent in 2010, the Bank of Portugal said today in its autumn economic bulletin. In July, the central bank had forecast GDP would shrink 2 percent this year and 1.8 percent in 2012.

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($104 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout. The government has already announced a one-time income-tax surcharge to help cover a budget shortfall this year.

“The budget deficit objective for 2011 will only be met with significant additional measures,” the central bank said in the report.

The government doesn’t plan any more tax increases, Finance Minister Vitor Gaspar said on Sept. 30. The government will rely on the other measures it already announced to reach this year’s deficit target, such as the transfer of some Portuguese banks’ pension funds, he said.

The government aims to trim the budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011 and to within the EU ceiling of 3 percent in 2013. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before starting to decline, the government predicted on Aug. 31. Debt was 93.3 percent of GDP in 2010.

Portugal is “on track” to meet its 2011 deficit goal, a team of EU and IMF inspectors said on Aug. 12. The IMF said in a Sept. 13 report that the government needs to improve control over expenditure and cut spending to meet its targets as it seeks to regain access to bond markets in 2013.

The government forecasts the economy will contract 2.2 percent this year and between 2.2 percent and 2.3 percent in 2012, before expanding 1.2 percent in 2013.

The central bank estimates export growth of 6.7 percent in 2011 and 4.8 percent in 2012. Investment will drop 11.4 percent in 2011 and 10.8 percent next year, while private consumption will decline 3.8 percent and 3.6 percent, respectively. It projects inflation of 3.5 percent for this year and 2.4 percent in 2012.

--Editors: Jeffrey Donovan, Andrew Davis

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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