Economic recovery will be slow

PORTUGAL’s economy will recover slowly from recession over the coming year, according to experts. But most economists agree that growth rates will stay below the European average and unemployment will continue to rise, from 6.3 per cent to 6.8 per cent of the workforce. Several factors hinder a swifter recovery.

Firms unprepared

for liberalisation

The recent liberalisation of the textiles and clothing market has opened the way for the entry of Asian products into Europe, so undercutting one of Portugal’s most important markets, accounting for 12 per cent of total exports. Economist Teodora Cardoso, from the BPI Bank, is gloomy about the effects: “Although this (liberalisation) had been agreed years ago, it appears that Portuguese firms have not made sufficient preparations. This will have a negative impact on exports and, even more seriously, on unemployment,” she says.

Portugal needs to catch up

Cardoso also says that, contrary to predictions from international organisations, economic growth during 2005 will remain below two per cent. This may be an improvement on last year, but it is disappointing when compared to Greece, Spain and Ireland, whose economies are expected to grow by between three and four per cent. The current average EU growth rate is 2.3 per cent, so it appears that the gap between Portugal and other developed countries may widen further. Overall, the economy failed to reap dividends from the country’s hosting of prestigious events last year. Figures from the National Institute of Statistics (INE) indicate that growth for the period of July to September fell to 1.2 per cent, so offsetting gains from Euro 2004 and Rock in Rio. “Data for the second half of the year is not good and the beginning of 2005 looks worse than we had anticipated,” says Miguel Beleza from the INE.

The strength of the euro against the dollar and the high cost of petroleum are also jeopardising economic recovery, in a Europe extremely dependent on exports. Chief economist of BPI Bank, Cristina Casalinho, says the euro could reach 1.4 dollars this year. Perhaps, the sole advantage of the euro’s strength is the positive effect on inflation, but the impact on exports is again negative.

Less buying power means

less investment

This would not be so worrying were it accompanied by rises in internal consumption or investment. But, in Portugal’s case, this is unlikely because of the current crisis in consumer confidence. High levels of debt mean families are unlikely to spend more and, if consumption is poor, then businesses also avoid new investments.

A future government cannot spend its way out of trouble, bound as it is by the terms of the European Stability and Growth Pact, which rules that a country’s budget deficit should be no more than three per cent of gross domestic product. The Pact may be revised, or even dissolved, but new regulations would probably take its place, since it is not in the interests of the EU to have countries piling up large budget deficits.

The cost of instability

Another factor hindering Portuguese economic recovery is political instability. With the election set for February 20, the contents of the likely amended budget will only become known in May or June. Until then, important decisions are on hold. This added uncertainty has led the Banco Espírito Santo to revise its growth forecast to below two per cent this year. “We still haven’t incorporated the current political instability into our forecasts. But the election will have a negative effect on decisions affecting investment and consumption,” stressed Carlos Andrade, the bank’s chief economist.

Minor compensations

Amidst the gloom, there is a glimmer of good news. Disposable income will increase, or at least remain stable. Public sector workers’ basic salaries will increase by 2.2 per cent (above the expected inflation rate of two per cent). This comes after a two-year pay freeze for people earning over 1,000 euros a month. The minimum salary will also increase from 365,60 euros per month to 374,70 euros. But these are relatively minor compensations in an otherwise pessimistic picture.

The average monthly salary is 845 euros, still well below European norms, and Portugal’s public sector is widely believed to be bloated and inefficient. Whichever party wins power on February 20 will find a difficult economic situation and little room for manoeuvre. Gabriel Hershman