Portugal's economy shrinks in final quarter of 2010

The Portuguese economy contracted on a quarterly basis at the end of last year as the government's austerity drive depressed domestic demand.

According to a flash estimate released Monday by the National Statistics Institute (INE) GDP was down 0.3 percent in the fourth quarter from the previous three months. On an annual basis, growth in output slowed to 1.2 percent from 1.3 percent in the third quarter. For the whole of last year the economy grew 1.4 percent, slightly better than the government had forecast.

Activity continued to be driven by the export sector, although the INE said the pace of growth was slightly slower at the end of the year. But consumer spending slowed, while the fall in investment eased somewhat.

Finance Minister Fernando Teixeira dos Santos latched onto the 1.4-percent growth figure as "frankly positive, above our initial expectations and also above our last forecast in October [of last year]," in reference to a foreseen rise of 1.3 percent.

The contraction in the last quarter "reflects a strong adjustment to the budget that had a negative impact on domestic demand, in particular private consumption."

The government last year managed to trim its budget deficit from 9.3 percent of GDP in 2009 to about 7 percent on the back of spending cuts and tax hikes. It is aiming to rein in the shortfall to 4.6 percent this year through another austerity budget that experts fear will drive the economy back into recession.

The government expects GDP growth of 0.2 percent this year, but the Bank of Portugal in January predicted it would shrink by 1.3 percent. That would further depress tax revenues, further complicating the task of reducing the deficit.

Portuguese government debt came under renewed pressure last week, with the benchmark 10-year bond hitting a euro-era record of 7.6 percent, prompting intervention by the European Central Bank.