Portuguese central bank sees wider recession

The Bank of Portugal on Tuesday painted a gloomy picture for the domestic economy this year, warning that it faced a "contraction without precedent" followed by virtual stagnation the following year.

In its winter report on the economy, the central bank predicted GDP would contract 3.1 percent this year as a result of the impact of the government's austerity drive agreed in exchange for a 78-billion-euro bailout from the IMF and the European Union. In its fall report, the bank forecast output would shrink by only 2.2 percent.

The bank, however, improved its estimate for the contraction in GDP last year to 1.6 percent from 1.9 percent. It predicted GDP growth of only 0.3 percent in 2013. That figure contrasts with the government's forecast of GDP growth next year of 1.2 percent.

"This contraction without precedent in economic activity will take the shape of a significant fall in domestic demand, both public and private," the bank said. While predicting ongoing growth in exports it said the increase would be insufficient to offset weakness elsewhere.

The central bank now believes private consumption, which accounts for about two thirds of domestic demand will contract 6.0 percent this year, compared with its October forecast of 3.6 percent, reflecting the impact of tax hikes, including value-added tax, and cuts in public sector wages.