Portuguese economy shrinks as austerity program bites

The Portuguese economy shrank in the third quarter as the austerity drive undertaken by the government as part of its commitments in its 78-billion-euro bailout package from the IMF and the European Union took a heavy toll on activity.

The National Statistics Institute (INE) said Friday GDP in the period July-September shrank a revised 0.6 percent from the previous three months when it fell 0.2 percent. On an annual basis, the contraction in output accelerated to 1.7 percent from 1.0 percent in the first quarter. The quarter-on-quarter figure for the third quarter was revised from an initial estimate of a fall of 0.4 percent, while the second quarter figure was revised from an initial drop of 0.1 percent.

The belt-tightening measures, which include cuts in public sector wage and state pension entitlements, weighed heavily on domestic demand, which fell 4.6 percent from a year earlier and shaved 5.0 percentage points off GDP.

Household spending dropped an annual 3.3 percent in the third quarter as unemployment rose. Total employment in the quarter decreased by 0.8 percent, the same pace as in the previous three months. Government spending shrank 0.2 percent.

The foreign sector continued to offset weak domestic demand, with exports in the third quarter rising 6.5 percent, while imports declined 2.8 percent. However, the contribution of net trade — exports minus imports — to overall GDP decreased to 3.3 percentage points from 4.6 points in the second quarter as the pace of activity in the EU slowed.

Portugal's main labor unions held a strike last month to protest the austerity measures, which also include extending the working day in the private sector by half an hour during 2012 and 2013.

The government is looking to bring its budget deficit back within the EU limit of 3 percent of GDP by 2013.