Bank of Portugal revises projections for local economy upward

The Bank of Portugal on Tuesday revised upward its growth forecasts for the domestic economy for next year, predicting a recovery in private consumption and an ongoing push from the exports sector.

In its winter economic bulletin, the central bank now sees GDP growing 0.8 percent in 2014, up from an estimated 0.3 percent in its fall forecasts. It also now expects output to contract by 1.5 percent this year, compared with a previous estimate for a decline of 1.6 percent. GDP growth is seen accelerating to 1.3 percent in 2015.

The bank revised its projection for private consumption next year to growth of 0.3 percent from an estimate of a contraction of 1.4 percent. The pace of growth in private-sector spending is expected to pick up to 0.7 percent in 2015. It revised its estimate for the decline this year to 2.0 percent from 2.2 percent previously.

Portugal emerged from an extended recession in the second quarter of this year, with the central bank estimating an accumulated decline in GDP over the period 2011-2013 of about 6 percent.

The bastion of the recovery will remain external demand

“The projections for the Portuguese economy incorporate a profile of a gradual recovery in domestic demand, limited by continuing fiscal consolidation and private-sector deleveraging,” the central bank said in its report.

The Portuguese parliament recently approved an extension of the austerity drive of the center-right Social Democrat-led coalition government of Prime Minister Pedro Passos Coelho, with opposition parties voting against the measures included in the 2014 state budget. The Passos Coelho administration needs to fund budget savings of 3.2 billion euros next year to cut the fiscal deficit further under the terms of its 78-billion-euro bailout from the IMF and the European Union.

The Bank of Portugal expects public spending to shrink by 1.5 percent this year, after the government resorted to mainly higher taxes to trim the deficit. The fall in spending by the public administrations is expected to widen to 2.3 percent next year. Investment is expected to grow 1.0 percent next year and by 3.7 percent in 2015 after shrinking by 8.4 percent this year.

The pick-up in private spending is expected to help domestic demand, making a slight but positive contribution to GDP growth next year of 0.1 points, accelerating to 0.9 points in 2015. The central bank previously expected a negative contribution from domestic demand in 2014 of 1.1 points.

The bastion of the recovery, however, will remain external demand. Growth in exports for this year is seen at 5.9 percent, slowing slightly to 5.5 percent next year and to 5.4 percent in 2015. “The recent behavior of exports has revealed the ability of Portuguese firms to find new markets, with a notable contribution from firms created over the past decade,” the central bank’s report said.

Net trade – imports minus exports – is forecast to contribute 1.1 points to overall GDP growth this year, slowing to 0.7 and 0.4 points in 2014 and 2015 as imports pick up as a result of the recovery in domestic demand.