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Portugal’s problems could be solved by joining Greece and Spain in one of the ‘Three Euros’

  • 23 February 2012

Today I wish not only to take a look at the latest data on how deep the current economic depression is in Portugal but I wish to look at the underlying causes of the situation and suggest some ways forward for her. If we go back to my article of the 9th of this month we saw the following grim picture. Industrial New Orders had fallen by 11.1% in December and the Industrial Turnover Index had fallen by 5.5% both on a year-on-year basis.

Today I wish not only to take a look at the latest data on how deep the current economic depression is in Portugal but I wish to look at the underlying causes of the situation and suggest some ways forward for her. If we go back to my article of the 9th of this month we saw the following grim picture. Industrial New Orders had fallen by 11.1% in December and the Industrial Turnover Index had fallen by 5.5% both on a year-on-year basis.

Since then we have learnt (15th of February) that not only did the Portuguese economy contract by 1.5% in 2011 but the rate of contraction accelerated from 0.5% in the first quarter of 2011 to 2.7% in the last.

What has happened since?

Unemployment has risen further

From Statistics Portugal

'The unemployment rate estimated for the 4th quarter of 2011 was 14.0%. This value is up 1.6 percentage points from the previous quarter. The number of unemployed was 771.0 thousand, which corresponds to a quarter-on-quarter increase of 11.8% (more 81.4 thousand persons).'

'The number of employed was 4 735.04 thousand, which corresponds to a quarter-on-quarter decrease of 2.4% (less 118.3 thousand persons).'

'The annual average unemployment rate was 12.7% in 2011 and the unemployed population was 706.1 thousand.'

So we see a grim sequence here of worsening unemployment and at a rapid rate. Back on the 9th of February I pointed out a type of misery index for Portugal adding high unemployment to inflation that is high for the circumstances in which she now finds herself. We now find inflation at 3.5% (-0.1) and unemployment at 14% (+1.3%) meaning that the measure has deteriorated by 1.2%.

Another sign of trouble is a rising level of youth unemployment and this is present here too. Portugal defines it as for the 15-24 age group and it has risen from 27% in the second quarter of 2011 to 30% in the third and now 35.4% in the fourth.

Statistics Portugal piles on the pain

'On a monthly basis, the economic climate indicator decreased again in January, maintaining the downward movement started in October 2010. The economic activity indicator, available until December, extended the descending path observed since September 2010. The private consumption indicator presented a stronger reduction in December, reflecting the more significant negative contribution of durable consumption. In the same month, the Gross Fixed Capital Formation (GFCF) indicator diminished more intensely.'

Fortunately there was some glimmers of hope from exports which were up by 12.4% in December on a year-on year basis. Unfortunately this comes with imports falling by 10.4% on the same basis. For Balance of Payments figures this is an outright improvement but for the overall economy falling imports is another sign of the economic crunch occurring. Indeed this move is likely to be flattering the already grim economic growth figures quoted above.

Can construction help?

'The new orders in construction index presented a year-on-year decrease of 22.5% in the 4 th quarter 2011 (-20.0% in the third quarter 2011),………. The quarterly change rate of the new orders in construction index was -18.4%, while the average change rate in 2011 stood at -17.7%.'

So apparently not! We are left with a particular feature of the credit crunch era as in conventional economic theory cuts in interest-rates and hence mortgage rates are supposed to stimulate the building industry. We have had plenty of cuts in official short-term interest-rates as the European Central Bank has cut its main rate from 3.75% to 1%.

This effect should have been particularly marked in Portugal as according to the last ECB survey some 99% of all mortgages are variable-rate ones.

Continue Reading…

 

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