Bloomberg News

Bank of Portugal Sees Deeper Economic Contraction in 2012

March 29, 2012

Portugal’s central bank said the economy will contract more than previously forecast in 2012 and won’t grow next year as consumer spending drops and export growth eases.

Gross domestic product will fall 3.4 percent this year after declining 1.6 percent in 2011, the Bank of Portugal said today in its spring economic bulletin. In January, the bank forecast GDP would decrease 3.1 percent in 2012, also a bigger drop than previously estimated, and predicted that the economy would expand 0.3 percent in 2013.

“The risks surrounding the current projection point to more unfavorable economic-activity developments,” the Lisbon- based central bank said in a statement. “These risks stem to a large extent from external-driven factors, in particular related to the sovereign-debt crisis in the euro area, which may constrain external-demand developments.”

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 last April in seeking a bailout and now plans to return to bond markets in 2013.

“If the macroeconomic environment weakens further, the adoption of additional measures that ensure the fulfillment of the fiscal goals may be necessary,” the Bank of Portugal said.

Investment, Consumption

The central bank forecasts investment will drop 12 percent in 2012 and 1.7 percent next year, while private consumption will decline 7.3 percent and 1.9 percent, respectively. It projects inflation of 3.2 percent for this year, after an increase in the value-added tax rates of some goods, and 0.9 percent in 2013.

Exports (PTTBEUEX) will grow 2.7 percent in 2012 and 4.4 percent in 2013, slower than estimated in January. Portugal’s current- and capital-account deficit will narrow to 2.8 percent of GDP in 2012 and 0.4 percent in 2013, from 5.2 percent in 2011, according to the Bank of Portugal.

Portugal narrowed its budget deficit to about 4 percent of GDP in 2011 from 9.8 percent in 2010 following the transfer of banks’ pension funds to the state. The government expects the shortfall will reach 4.5 percent of GDP in 2012 and the EU ceiling of 3 percent in 2013.

The IMF expects Portugal’s ratio of debt-to-GDP to stabilize at about 115 percent in 2013 and then gradually decline, Abebe Aemro Selassie, the head of the fund’s aid mission to the country, said on March 5. Debt was 93.3 percent of GDP in 2010.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net


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