Bank of Portugal predicts much deeper recession than the government this year

The Bank of Portugal on Tuesday predicted another dire year for the domestic economy, which is expected to shrink by almost double the amount estimated by the government.

In its winter bulletin on the outlook for the economy posted on its website, the central bank forecast that GDP would contract 1.9 percent this year after a drop in output of 3.0 percent last year. In its fall report, it estimated a contraction of 1.6 percent. The government and the so-called troika – the IMF, European Union and European Central bank, expect GDP to contract 1.0 percent this year.

The ongoing austerity program imposed on the government of Prime Minister Pedro Passos Coelho in exchange for a bailout of 78 billion euros will continue to weigh on domestic demand, which the central bank expects will make a negative contribution to GDP of 4.0 percentage points, compared with a negative 7.2 points in 2012.

However, the main reason for the revision in the size of the contraction is weaker export growth, largely because of the slowdown in the euro zone. This will cause the positive contribution of net trade -- exports minus imports -– to slow to 2.1 percentage points from 4.2 points.

The bank expects activity to turn positive again in 2014 when GDP is forecast to grow 1.3 percent due to a positive contribution both from domestic demand (0.8 points) and net trade (0.6 points). Growth will be supported by higher disposable income and a pick-up in exports in line with an expected recovery in the global economy.

“The outlook for the Portuguese economy in 2013 and 2014 continues to be marked by the process of adjustment of the structural macroeconomic imbalances, including the short-run impact of fiscal consolidation measures, as well as tight financing conditions,” the central bank said.

The bank noted that one of the positive effects of the austerity and reform program has been to rapidly reduce Portugal’s net foreign borrowing requirements. It said the current and capital account moved from a deficit of 9.4 percent of GDP in 2010 to a situation of close to equilibrium in 2012. It predicted a trade surplus of 3.1 percent and 4.4 percent of GDP in 2013 and 2014 respectively.