Bank of Portugal predicts long and painful recession

By CHRIS GRAEME [email protected]

The Governor of the Bank of Portugal, Carlos Costa, has warned that Portugal faces a long and painful recession.

However, the economist and former vice-president of the European Investment Bank said that it would not be as hard as the IMF/European Union/European Central Bank Troika had predicted.

According to the latest Bank of Portugal figures, Portugal is already in the longest and deepest recession of the last decades.

Private consumption is set to plummet to a degree never before seen while unemployment is set to rise by 100,000.

That is the scenario facing Portugal in the next two years, but even so the current course of austerity policies is the only course of action capable of turning the situation around in the long term, argues the BdP.

On Monday the Bank of Portugal predicted a strong contraction of the economy in the short term but a rapid correction and return to sustained growth in the medium to long term driven by increased exports.

The BdP predicts that the country’s GDP will contract two per cent this year, 1.8% next year (the Troika’s predictions are worse for this year: 2.2% in 2011 and 1.8% in 2012)

The figures were released taking into account the new Government’s latest austerity measure: the introduction of an extraordinary IRS income tax of €800 million.

The Bdp’s overall optimism is based on its positive projection for exports over the next few years and that following the IMF’s entry into Portugal the confidence of the Portuguese, according to various polls both in the business and consumer sectors of society, has not fallen as much as had been expected.

However the BdP has warned that the public is likely to seriously tighten its belt – in real terms the Portuguese are likely to spend 3.8% less this year and a further 2.9% in 2012.

These amounts are clearly higher than the figures registered the last time when the IMF was in Portugal in 1978 and 1983.

One of the reasons why is a fall in employment by 1.1% this year and 0.9% in 2012 (around 100,000 jobs in all).

Another factor is an expected fall in investment by over 10% over the next two years and reduced private consumption by 5% for the same period.

On the other hand, as consumption and investment fall, imports will also plummet (a predicted four per cent this year) while exports will rise and contribute towards rebalancing the country’s balance of payments.

A further reason behind the projected fall in consumer consumption is the fact that banks are lending less credit to families.

This in turn means that the banks will need less foreign credit to finance their operations as internal consumers borrow less, spend less and save more.

With regards to the State and its deficit and spending, the Bank of Portugal did not release any figures, but did mention that meeting its goals were in line with the Troika (5.9% this year).

The main motor for Portugal’s economic recovery remains exports from Portuguese companies which, according to the BdP’s Summer Bulletin remain encouraging: a growth of 7.7% this year and 6.6% next year.

And according to projections released on Monday, Portugal will register an external deficit of 4.4% of GDP in 2012 (exactly a half of the amount registered in 2010 – 8.8%), while the deficit for goods and services is likely to be slashed to an encouraging zero, going from 6.5% to 0.7% in two years.