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Economic Bulletin – Autumn 2012: Outlook for the Portuguese Economy 2012-2013

  1. 2012 has been marked by the continuation of the Portuguese economy’s adjustment process, in the context of the economic and financial assistance programme. The Portuguese economy evolved in a context of restrictive monetary and financial conditions – against a background of disturbances in the monetary policy transmission mechanism in the euro area – and maintained a contractionary fiscal policy stance. In this framework there was a deterioration of the Portuguese economy’s cyclical position, characterised by a strong decline in GDP and significantly higher unemployment.
  2. In 2012 and 2013, economic activity is projected to decline by 3.0 and 1.6 per cent, respectively, given that the sharp contraction of domestic demand will be only partially compensated by the positive dynamics of net external demand.
  3. Exports of goods and services are expected to maintain remarkable growth in 2012 and 2013, in a context of muted economic activity developments in the main Portuguese commercial partners. Export dynamics are projected to imply significant market share gains in both years. This evolution, along with a reduction in imports, resulted in progress in the adjustment process in 2012, namely in terms of the rebalancing of the current and capital account balance. In this vein, the current and capital account is projected to record a surplus in 2013, after a virtually nil balance in 2012.
  4. As regards the evolution of domestic demand in 2012-2013, the restrictive orientation of fiscal policy, along with unfavourable expectations concerning economic activity and labour market developments, the perception of a permanent income reduction and the accumulation of savings due to precautionary motives justify the strong private consumption decrease, especially in the durable goods segment. Additionally, expectations of domestic demand reduction, the high uncertainty level and the restrictiveness of monetary and financial conditions imply a significant contraction of gross fixed capital formation.
  5. The inflation rate in Portugal, as measured by the average rate of change of the Harmonized Index of Consumer Prices (HICP), is expected to stand at 2.8 per cent in 2012. This projection is largely conditioned by the impact of several measures associated with the fiscal consolidation process that came into force in both 2011 and 2012, with particular emphasis on the increase of the value added tax rates (VAT) applicable to some products. The fading out of the effect of these fiscal consolidation measures, in a context of much muted internal pressures on prices, is projected to determine a reduction in inflation to below 1 per cent in 2013.
  6. The current projections are conditioned by a high degree of uncertainty, associated to several factors (external environment dynamics, impact of the domestic economic policy measures, economic agents’ response and medium to long term adjustment process of the economy). These factors determine that the baseline projections are surrounded by a particularly wide confidence interval. The current projection is marked by risks of more unfavourable economic activity developments. In particular, the projection for exports may be negatively affected by a more adverse external environment for the Portuguese economy, characterized by high uncertainty. Additionally, the economic agents’ capacity of smoothing consumption may reveal to be more limited, translating into a stronger reduction of this expenditure component. Risks for inflation are considered to be mildly on the downside, resulting from possibly more unfavourable economic activity developments, partially compensated by the possibility of stronger nominal effective euro exchange rate depreciation.
  7. The management of the dynamics of the Portuguese economy’s adjustment process is extremely important and involves various policy challenges. A potential moderation of the intensity of the adjustment effort, namely in fiscal terms, is conditioned by the financing requirements of the Portuguese economy and implies a higher level of debt accumulation, thereby worsening sustainability conditions. In such conditions, a fiscal adjustment that contributes to increase potential growth of the economy cannot be delayed. The existence of social consensus regarding the adjustment process guidelines is a sine qua non for maintaining credibility in the international financial markets and with international authorities and, consequently, for the success of the adjustment programme. The promotion of economic growth, based on export dynamics, speared by the private sector and benefiting from the public sector’s catalysing role may be an important aggregating factor.

Authored articles:

As usual, this Bulletin includes four articles authored by economists of Banco de Portugal (in one case in co-authorship with an external researcher). The articles, which are the sole responsibility of the authors, are:

  • "Measuring competition in the Portuguese economy using profit elasticities" João Amador and Ana Cristina Soares
  • "An evaluation of government expenditures' externalities" João Valle e Azevedo and Valerio Ercolani
  • "Product switching or re-classification? An application to Portuguese international trade" Rúben Branco and Luca David Opromolla
  • "Short-term forecasting for the Portuguese economy: a methodological overview" Paulo Esteves and António Rua

Lisbon, 13 november 2012