Last week saw the announcement of new monetary measures from the European Central Bank and today I intend to analyse one of the economies they are intended to help which is Portugal. It struggled under the initial impact of Euro area austerity and plunged into a recession which in truth looked rather like a depression. However there was a turn for the better as 2013 progressed as ten quarters of economic contraction ended and were replaced by more positive trends. As ever it takes time for the annual numbers to catch up but as you can see from the annual report of the Bank of Portugal even they improved.
In 2013 GDP decreased by 1.4 per cent, in real terms, following a 3.2 per cent drop in 2012.
What about the national debt?
The Euro crisis saw the Euro area authorities establish a benchmark of a national debt to Gross Domestic Product ratio of 120% as a benchmark. Unfortunately for Portugal, its combination of falling GDP and fiscal deficits saw its ratio surge through this benchmark like a knife through butter. According to the Bank of Portugal it is now 135.4%.
General Government debt data reached 225.9 billion euro in April 2014, an increase of 5.2 billion euro when comparing with the previous month.
In an example of ‘it never rains but it pours’ Portugal is being forced by Eurostat to add debt from public corporations to the total and that amounted to 3.5 billion Euros in April. So just as one might have hoped for an improvement there is another reason to frown. Whatever the reasons the last year has seen the national debt rise by 8% according to the Maastricht definition and this has come with an economy beginning to turn around.
Just to mark your card there will be debt redefinitions for other countries with the UK too seeing rises as Eurostat gives it a bit of a nudge.
Help from the ECB
For some time the cost of issuing debt was taken over by Portugal’s Euro area partners and the International Monetary Fund. Now as it looks to stand on its own feet Portugal has something to thank the ECB for, which is that it is now much, much cheaper for it to issue its own debt. This morning (h/t @minefornothing) its ten-year yield has fallen to 3.44% which is the lowest since January 2006. This compares to the double-digit yields that pushed as high as 18% if my memory serves me correctly at the height of the Euro area crisis. So congratulations to those who invested in Portuguese bonds back then.
The role of the ECB in helping the peripheral bond markets comes from the promise by its President Mario Draghi in the summer of 2012 to do “everything it takes” for the Euro (project). In the event Outright Monetary Transactions or OMTs have become filed under the category of Jedi Mind Tricks as they have never been fired in anger. As you can see from the yield quoted above last week’s ECB announcement has seen the bond price rally continue. Who would have thought that we would be looking at a Portuguese benchmark bond yield only three-quarters of a percentage point above that of the UK Gilt?
If we take stock of this move, we see that the Portuguese government sees several gains here but the real economy much less so. At the most basic level there is demand for Portuguese debt! There were times when this was heavily in doubt. Furthermore the debt servicing costs will be lower and will therefore be helping the fiscal deficit. This should provide a minor nudge for the economy as either there will be less austerity or extra funds will be available.
Another group grateful to the ECB will be investors in Portugal’s stock market as the PSI-20 index which fell into the 4400s is at 7347 as I type this.
The real economy
We have observed before that improvements in the financial economy are only weakly associated with the real one in the credit crunch era, especially if the most powerful one – the currency remains a hindrance. Also we note from the past that even in the better years preceding the credit crunch Portugal averaged economic growth of a miserly 1% or so per annum. Perhaps even the rose-tinted views of the IMF exhibit some concern on this front.
However, making the economy more dynamic, flexible and resilient is an ongoing challenge.
Its report predicts growth this year of 1.2% rising in the medium-term to 1.8% which is not that much better than the past. Indeed if we consider the economic depression which Portugal was put through, it is going to be quite some time before it regains the ground lost if that is the pace of it. When economists discuss V and L shaped recoveries this looks much more of an L which, in my opinion, is quite a disappointment.
If we look back we see that economic output in the last quarter of 2013 was back to the sort of levels seen in the same quarter of 2002. So if this was an episode of Doctor Who the TARDIS jumped eleven years back in time.
One hopeful sign going forwards is that the overall Euro area economy is growing albeit slowly. Also as commenters have pointed out here, the UK mini-boom has seen UK tourists back in Portugal in force. So the international environment is more positive than it was. Also an ex-colony Angola has reversed old roles and has been investing in Portugal.
On the other side of the coin, austerity is not finished as last year Portugal ran a fiscal deficit of either 4.9% or 5.3% depending how you count the numbers, the difference is very credit crunch era is it not? Let us look deeper.
The situation has stopped plummeting but as you can see from the numbers below there is no clear swing the other way yet.
Retail trade turnover index registered a year-on-year change rate of -0.2% in April 2014 (0.9% in March 2014). Employment, the number of hours worked adjusted of calendar effects and wages and salaries presented year-on-year change rates of -0.6%, -1.6% and 1.3% in April, respectively (-1.0%, -3.0% and 0.7%,in March by the same order).
A factor holding domestic demand down has been the austerity inspired rises in the tax burden
In 2013, the tax burden increased by 8.1%, after the reduction observed in 2012, accounting for approximately 34.9% of GDP (32.4% in the previous year)…..
Regarding direct taxes, there was an increase of 34.3% in the individual income tax
What about prices and inflation?
According to the official figures then prices are pretty much going nowhere in Portugal right now.
The CPI recorded an annual rate of change of -0.1% in April 2014. Excluding energy and unprocessed food, the annual rate was 0.1%.
Producer prices are falling at an annual rate of 0.6% as we observe what is called “internal devaluation” in action.
Whilst this had been an improving sector this morning’s release looks less hopeful.
In year-on-year terms, Industry Turnover Index nominal change rate was -1.8% in April (-0.6% in the previous month) reflecting the reduction of 15,5% in Energy.
The fall was even more marked in export terms as turnover here fell by 3.3%.
As the rise of unemployment in Portugal was a big issue in its crisis it is nice to be able to report better news on the employment front at the beginning of 2014.
The employed population increased by 1.7% from the same quarter of 2013 (72.3 thousand people).
The catch is that sustained economic growth is the only thing which will drive this number back upwards and help trim the still high unemployment rate.
In essence the Portuguese appear to be not only jumping ship and emigrating but they are having fewer children too.
In 50 years the percentage of children in the resident population decreased from 29.2% in 1960 to 14.9% in 2011…….In 2013, 82 787 live births were registered (from mothers residing in Portugal), a new low regarding the 213 895 live births registered in 1960.
That is like something out of an apocalyptic science-fiction novel is it not? Whilst we should make some allowance for the fact that people are now living longer this situation poses clear problems for Portugal as time goes by.
After a type of economic nuclear winter, Portugal must have let out a huge sigh of relief which a few flickers of sunshine appeared in 2013. The export cavalry arrived but is it a rescue? If we look at today’s GDP revision there are some troubling messages. Firstly this one.
Comparing with the fourth quarter, the Portuguese GDP diminished 0.6%.
Not quite on message with the recovery theme is it? The breakdown poses questions too.
Net external demand presented a significant negative contribution to the GDP year-on-year change rate (-1.6 percentage points), after a positive contribution in the fourth quarter (1.0 percentage points)……This was the first negative contribution of net external demand since the second quarter 2010.
This was reinforced by the trade numbers for April.
Exports of goods decreased by 0.8% and imports of goods decreased by 0.1% in the quarter ended in April 2014, when compared with the quarter ended in April 2013.
As investment growth decelerated too that meant that a couple of positives for the Portuguese economy have weakened which it can ill afford. Looking forwards emigration and the birth rate pose issues but over the next few years I note that the IMF has reduced its hopes for growth. When the program started it expected economic growth above 2% and reaching 2.5% whereas now hopes of 1.8% at best represent being “on track”. Also the consequence of this is a national debt to GDP ratio currently some 20% higher than the 115% which was to be the supposed peak.