At the latest Euro-Group summit which ended last night we saw yet again the use of the phrase “on track” for Portugal. This time amongst the users of what has become a chilling phrase with its hints of the type of perversion of language used in 1984 and Brave New World was Portugal’s Prime Minister Passos Coelho. The obvious translation that she is about to see a light at the end of the tunnel has instead time and time again found itself twisted to the reality of the light being an onrushing locomotive representing economic depression.
Portugal’s Economic Situation
If we take a look at the autumn report of the Bank of Portugal we see this.
The contraction of Gross Domestic Product (GDP) for the third consecutive year
Not exactly the sort of track the Portuguese would want to be on is it? And we spot in the detail a clear change as previously conforming to my rule about official forecasts often being fantasies Portugal was expected have zero growth next year.
The current projections for the Portuguese economic activity envisage a further contraction in 2013 (1.6 per cent), albeit of a smaller magnitude than projected for 2012 (3 per cent)
I am sure that Portuguese readers will be afraid that by the time we get into 2013 there may be further downgrades which reduce it to the levels of 2012. After all she is still in the process of adding to her austerity programme.
This process ( Economic and Financial Assistance Programme EFAP) has translated into a considerable reduction of public and private domestic demand, which should reach around 17 per cent in cumulative terms in the 2011-2013 period.
There is not much hope of the Portuguese consumer coming to the rescue in 2013 if you combine the two factors below.
a virtual stagnation of wages
Developments in real disposable income in 2013, which are expected to imply a decline close to the one projected for 2012, largely refl ect the impact of the fiscal consolidation measures to be adopted in this period, especially changes in indirect taxes.
So austerity will bite via higher taxes on unchanged wages.
GFCF (Gross Fixed Capital Formation or investment) is expected to decline by 10 per cent in 2013, after a reduction of around 15 per cent in 2012.
For those who have followed the debate on Keynesian multipliers and the International Monetary Fund’s recent volte face on this subject there is food for thought here. This is exactly the sector where anyone with any sense (aka not those running this programme) would have expected the multiplier to be high. For those who have not this is the area you should cut with extreme caution rather than gay abandon. Portugal is far from the only country that has made this error as my own, the UK, has made it too. But the levels in Portugal have been (suicidally) high.
GFCF is expected to drop in 2012 for the fifth consecutive year, posting a cumulative decline of almost 35 per cent in this period.
If they join the dots of their own forecasts it is now expected to drop for the sixth consecutive year.
What about the fiscal deficit?
Officially this is also “on track” for the target of 5% of economic output or GDP in 2012 although I note that the Bank of Portugal quotes other bodies as saying this rather than saying so itself! Perhaps it has concerns over this.
According to the Quarterly National Accounts published by INE at the end of September (Table 3.1),the general government deficit stood at 6.8 per cent of GDP in the first half of 2012 (8.2 per cent in the same period of 2011).
So better but not on track at all. We now know that Portugal’s economy has weakened since and we also know that ominously she is running out of temporary measures to help such as the raid on bank pensions. Indeed revenue trends are poor.
In the first semester of 2012, tax revenue decreased by 4.6 per cent, compared with the same period of the previous year.
So in essence the Bank of Portugal is lining itself up with the reggae singer Shaggy when inevitably the deficit forecasts are missed.
It wasn’t me
It wasn’t me
Indeed if you look deeper into the report you see signs that in fact the Bank of Portugal -if you translate the central banker code- is in fact deeply troubled.
In particular, in 2013 the tax burden will increase very markedly, mostly for households and, to a lesser extent, corporations.
So tax revenue is spiralling downwards and the response is to increase taxation rates further! I am afraid that this is the economics of the mad house.
2012 saw increases in indirect taxation (VAT) and now 2013 will see increases in income tax with presumably pretty much the same result.
The reduction in employment over the projection horizon extends to the public and private sectors,
It was only on Friday that I discussed the rise in the unemployment rate in Portugal to 16.3% and it looks like such rises will continue.
This is the one good bit.
Exports are projected to grow by 5 per cent in 2013, compared with 6.3 per cent in 2012
Although if this does not happen 2013 in Portugal looks on track to be even more grim than 2012.
What does the latest data tell us?
The retail trade turnover index (seasonally adjusted and at constant prices) registered a year-on-year change rate of -6.9% in October (-5.9% in September).
So bad and getting worse and we also see that some of the component parts are extremely weak too.
The year-on-year change rates of the indices of employment, of the number of hours worked adjusted for working days and of wages and salaries were -5.9%, -5.5% and -4.8%,
Let’s not beat about the bush as these are simply figures reminiscent of a country in an economic depression as we saw a new low for the underlying index of real retail sales of 83.1 where 2005 is the benchmark of 100.
There are some glimmers of hope here.
Industrial Production year-on-year change rate was -4.3%, in October, up by 5.2 percentage points from the rate observed in the previous month. The year-on-year change rate of the Manufacturing Industry index was 0.5% (-8.4% in September).
Unfortunately in the credit crunch era there seems to be an issue with the October figures not being adjusted properly as peaks are followed by a return to falls in November and December. If I am wrong no-one will be happier than me but sadly I expect this to be like a summer shower in Portugal. Underneath this we see that the underlying index for industrial production is at 85.5 where 2005 = 100.
If you set out to destroy an economy then what I have outlined above is the sort of methodology that might be applied. Portugal has found itself plunged into an economic depression which currently has no end in sight. A further danger for her is that her national debt to economic output (GDP) ratio slides even more dangerously out of control. As of halfway through 2012 it was 117.5% which is quite an acceleration on the 106.7% of a year before. On that subject how is the raising of the capital subscription to the European Stability Mechanism coming along?
Just when you think that things cannot get much worse then the Bank of Portugal now has worries about the housing market and its possible effects on her already weakened banks.
the reductions on the real estate market that have been seen because of a slow-down in demand may imply some risk for banks if mortgages end with owners handing their property back to the banks
Even the hope that Portugal might benefit from the lower interest rates recently promised to Greece seems to have been extinguished by official denials. This is not a final no as these boys and girls are very inconsistent at best but not hopeful right now. Although Portugal has seen reductions in market interest rates as whilst she does not issue bonds she does issue Treasury Bills and the rates she has had to pay have fallen.
So what track is Portugal on? Music gives us a few choices
Highway to Hell by AC/DC
Straight to Hell by the Clash
Road to Hell by Chris Rea