Portugal Slump to Deepen as Austerity Bites

http://www.bloomberg.com/news/2011-07-11/portugal-slump-to-deepen-as-austerity-bites-central-bank-says.html?cmpid=

Portugal’s economy will shrink more than forecast this year and contract in 2012 as the austerity measures that were required for an international bailout take hold, the country’s central bank said.
Gross domestic product will shrink 2 percent this year and 1.8 percent in 2012 after expanding 1.3 percent in 2010, the Bank of Portugal said in its summer economic bulletin today. In March, before Portugal sought a rescue, the estimates were a 1.4 percent contraction this year and 0.3 percent growth in 2012.

The government of Prime Minister Pedro Passos Coelho is implementing spending cuts and tax increases that were part of a 78 billion-euro ($109 billion) financial aid package from the European Union and the International Monetary Fund. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in April in seeking a bailout.

“The need to reinforce the consolidation of public finances, as well as a gradual deleveraging of the private sector, including the financial system, are essential to ensure a balanced and sustained development in the long term,” the central bank said in the report.

Portugal’s central bank estimates the current and capital account deficit will narrow to 4.4 percent of GDP in 2012 from 6.4 percent this year and 8.8 percent in 2010. It forecasts export growth at 7.7 percent in 2011 and 6.6 percent in 2012, and inflation of 3.4 percent for this year and 2.2 percent in 2012.

Investment Slumps

Investment will drop 11 percent in 2011 and 10 percent next year, while public consumption will decline 6.3 percent and 4.4 percent respectively.

The central government will reduce the number of employees by 1 percent a year, with local and regional governments’workforces shrinking twice as fast. Tax deductions will be limited and some value-added tax rates will be raised. Portugal also agreed to phase out rent control and plans to merge or close some institutes and state-companies.

The three-year aid plan set goals for a budget deficit of 5.9 percent of GDP this year, 4.5 percent in 2012 and 3 percent in 2013. The country had the fourth-biggest gap in the 17-country euro region last year at 9.1 percent of GDP.

Portugal’s public debt swelled to 93 percent of GDP in 2010 from 68 percent in 2007. The European Commission forecasts Portugal’s debt will increase to 101.7 percent this year and 107.4 percent in 2012. The debt ratio will start declining from 2013, the previous government said.
Portugal exited its previous recession in the second quarter of 2009. It slumped again after GDP dropped 0.6 percent in the first quarter, repeating a 0.6 percent slide in the previous three months, the statistics institute said on June 9.

The country’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest rates.