How is Portugal doing? She is trapped in a circle of austerity then economic decline and repeat

As you can now see from its front page Mindful Money has hit difficulties and I am not sure how long it will continue. As I have plenty to say and have plenty of plans for the future I wish to make it clear that I intend to continue blogging and should Mindful Money close my thoughts and analysis will return to.

There has been a recent turn in sentiment in some places on the situation regarding the Portuguese economy and today I wish to analyse the true position. The Financial Times published an online article at the end of last week suggesting that it may be turning. If nothing else this was a contradiction on one of the main economic news stories of the week which was the u-turn made by the International Monetary Fund on the impact of the austerity programmes which it had previously supported with such enthusiasm. Because if austerity is much less effective than thought and indeed has negative effects on an economy then Portugal which has had a heavy dose of it and is in the process of receiving more might be about to see a turn but downwards and not upwards!

What is the evidence for Portugal being on the mend?

This was mostly based on this evidence from the Financial Times Alphaville article.

we got figures from Portugal’s Office of National Statistics this week saying that in August exports rose 13.7 per cent, year on year, with exports to non-EU trading partners up a whopping 37.3 per cent

This reminds me of two of the long running themes of this blog. Firstly that monthly trade statistics are very unreliable and are amongst the most inaccurate economic figures we receive. Secondly that in the case of Portugal she has improved her export performance but that unfortunately it has been unable to offset by enough the way that her domestic demand has plummeted. Even if we stay with the issue of monthly export growth there were better figures in November last year and January of this and we all know what happened next in the Portuguese economy.

However I do not wish to rule out this point entirely as if we look for a little more perspective from the latest quarterly figures Portugal has seen an improvement in her trade performance.

In the quarter ended in August 2012, exports of goods increased by 10.4% and imports decreased by 1.5% vis-àvis
the period June 2011 through August 2011.

This has helped her bond market improve

As 2012 has progressed there has been a considerable rally in the Portuguese government bond market. Her ten-year bond yield has dropped to just over 8% which is a vast improvement on late January when it went above 17%. So a considerable improvement which has allowed Portugal to do a “bond swap” moving a 2013 exposure to 2015 which relieves some pressure on her,for the immediate future anyway.

However in a world where any yield is hard to find I suspect that some funds may have found double digit yields irresistible and to the early buyers I can only say well done as profits are substantial now. Added to this has been the role of the European Central Bank which has expanded its role under Mario Draghi’s leadership in 2012  beginning with its LTROs (over a trillion Euros of liquidity) to its interest-rate cuts and now to its promises of new bail out policies. Once you take that route the improvement may have little to do with Portugal’s economy and much more to do with her backers the troika (IMF,ECB.EC) being perceived to be more determined  and willing to continue her support.

The other side of the argument

The austerity noose is in the process of being tightened

Today there will be a debate in the Portuguese parliament over the latest round of austerity measures. These need to be severe because of the way that Portugal’s economy has shrunk as indicated by the latest European Commission report on the subject.

In spite of a rigorous budget implementation on the expenditure side, data until July point to a budgetary gap of 1¾ percent of GDP in 2012 compared with budget plans.

Apparently this is the result of being “on track” or to use the latest euphemism from the head of the Bank of Portugal being on a “good path”. In other words we are seeing yet more abuse of language as according to the European Commission this “good path” requires the following.

Even under the revised targets significant consolidation efforts of 3 percent and 1¾ percent of GDP will be necessary in 2013 and 2014.

You may spot the “revised targets” bit. Yes things are going so well that the targets have had to be relaxed! So Portugal will be even more indebted in what to Greek readers will be a familiar trend.

As a result of this adjustment of the targets, the sovereign faces an additional financing need of EUR 3.9 billion in 2012-2014 compared with original Programme plans.

Remember this is on the optimistic route that the targets are met which so far has not been the case. Also we see that “one-off” measures are being swept under the carpet to some extent as if you allow for the bank pension grab which took place a 2.78 billion Euro capital gain is on Portugal’s 2012 figures.

But the fundamental point here is that the hardest turn of the austerity screw is about to hit Portugal and it is going to impact on an economy where even the official view is for a shrinkage of 3% in 2012.

Talking of economic growth

A regular theme on this blog is that official economic growth forecasts are if one wishes to be polite, rose-tinted. To them the future is always bright. However 2013 has been revised down from the summer view of flat to an autumn view of a  contraction of 1%.

What is the state of Portugal’s economy right now?

The Service Sector

This is the largest component of any modern economy and the latest numbers from Portugal’s statistics office are below.

The services turnover index, adjusted for calendar and seasonal effects, registered a year-on-year change rate of -9.5% in August (-10.1% in the previous month). The year-on-year change rates of the indices of employment, wages and salaries, and number of hours worked adjusted for calendar effects were -7.6%, -8.4% and -7.2%, respectively (-7.6%, -8.6% and -6.3% in July, by the same order).

Whilst there are some marginal imporvements here on a monthly basis overall these are numbers of an economy locked in an economic depression. If we look at the wages numbers we see that they continue to fall which reminds us that these falling wages are likely to see higher taxation in 2013 if Portugal’s government can get its budget plans passed later. This has an obvious implication for future consumption and domestic demand trends.


The falling unemployment numbers above also remind us that the trend for Portuguese unemployment to rise looks likely to continue. Earlier this month Eurostat gave us an update which included August.

Compared with a year ago (the unemployment rate in) Portugal (rose from) 12.7% to 15.9%.

So it has risen by 3.2% over the year to August. Rather than an improvement this is an acceleration as the figures for the second quarter of 2012 according to Portugal’s statistics office saw a rise of 2.9% on the year before.


This is often the first sector to show a recovery as easier monetary policies tend to impact on the housing sector first. But as you can see it remains something of an economic wasteland.

The index of production in construction decreased by 17.1% in the quarter ending in August 2012, in year-on-year terms (3 months moving average, working days and seasonally adjusted), after decreasing 18.9% in July.


Here we see that if were to put this to music then “You’re Still The Same” by Bob Seeger applies here.

Industrial new orders index decreased, in August, by 8.7% in year-on-year terms (reduction of 8.5% in July).

This trend has been in place since the peak over a recorded over 30% annual increase in January 2011. Also for those looking at the prospects for Portuguese exports there are obvious worries in the numbers below.

while the external market index moved from a year-on-year change rate of -1.0% in July to -0.4% in August

Two negative months in a row for a series which had remained positive since February.

However industrial turnover did put in a better performance in August.

Industry Turnover Index registered a nominal year-on-year change rate of -1.6% in August (-4.0% in the previous month).

The improvement was due to this “energy industry turnover” and I would be interested as to whether readers have any furhter insight into this.


We see from today’s analysis that whilst there are flickerings of light in Portugal’s export sector they have been so far heavily outweighed by the fall in her domestic demand. For this to change we have the problem that domestic demand in 2013 and 2014 is likely to receive a further kick in the teeth from todays supplementary budget plans. Also August is a month where export volumes are lower than usual so any changes look larger than they would otherwise be.

Accordingly as someone who likes Portugal and its people I regret very much have to tell you that the -1% economic growth forecast for her in 2013 looks more likely to be revised further downwards than upwards. However there is another way and I am grateful to the Portuguese economist Rui Esteves for reminding us of the similarities of the current situation to 1892. How did Portugal escape? By a default or if you like a haircut which represented.

about 40% of the total fiscal consolidation.


This entry was posted in Euro zone Crisis, GDP, General Economics, Quantitative Easing and Extraordinary Monetary Measures, Yield. Bookmark the permalink.
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  • Anonymous

    The situation here just does not seem to stop does it? As you keep telling us Shaun the more they cut back the more they weaken the underlying economy. And yet the same policies keep being applied!
    I wonder how many more protests we will see in Portugal. I would not be surprised to see them get stronger and stronger.

  • JW

    Hi Shaun
    The ‘Balticisation’ continues. Forgive the word which seems to have been used to describe loosening of periphery countries/regions, and maybe true when applied to the EZ. However here I mean the ruinous depression of an economy and its people to create a ‘balance of payments surplus’ to the detriment of the vast majority and usually coincides with mass emigration. ( could also be describing Ireland).

  • Rods

    Hi Shaun,

    Another good piece of analysis.

    We know from the OECD that every 1% tax rise decreases GDP by more than 1% and that government cuts do far less damage to an economy.

    Yet all government austerity measure tend to be front loaded with tax rises and back loaded with government cuts. Which is the best route to shrink the economy! The government cuts also tend to target capital spending first as this is an easy target, yet with good capital expenditure for every €1 spent you get a €2.5 return to the economy.

    The current situation shows the weakness of governments by taking the easy route of tax rises and capital expenditure cuts, so making the austerity a failure so, they then repeat with a few more clicks of the economic noose.

    Where Portugal’s government collects about 37% of GDP in tax, there must be scope to remove plenty of dead wood from this. They could then have tax cuts to provide a boost to the economy.

    But there again if they had good government they would be dumping the Euro and defaulting to get on to a sustainable economic path again.

  • DaveS

    Hi JW

    But if you run a balance of payments deficit then you have to borrow externally to fund it. If you can’t borrow, then you have to print, If you print you get inflation, falling real wages and falling domestic demand. If you inflate wages you risk hyper-inflation and economic collapse.

    Whatever way you play it, the citizens will be poorer – and my feeling is the more central bankers intervene, the worse will be the outcome as they will seek to prop up the failed economic model and prevent restructuring i.e. this is what is happening in the UK.

    We have externally devalued but its not working, there is no export led recovery because we simply don’t make enough to export. Instead we have a vicious circle of debt monetisation and inflation and desperate attempts to pump the housing market again. What future is that ?

  • forbin

    apparently the only one we’re going to get , Dave

    but atleast we have a currency , for now, but if old wossiname gets in and writes off all that QE …..

    Interesting times


  • Anonymous

    Hi JW
    I agree. If we put it another way we are looking at a traditional IMF policy without the depreciation/devaluation of the currency. What we are seeing is that the squeeze in such a circumstance has to be more severe to achieve a balance of payments surplus. The way that the IMF has allowed its role to be changed from being an organisation which deals with balance of payments issues to one who deals with fiscal deficit problems reflects badly on all those involved in it.
    If this had been applied the traditional way with a weaker currency it might have been working by now instead I fear for 2013 and 14.

  • Anonymous

    Hi Rods
    Thank you. I am sorry to report that Portugal has indeed taken the same mistaken path tonight. As Reuters report.
    “Gaspar said new taxes would amount to 4.3 billion euros in 2013, representing
    80 percent of next year’s austerity measures,”
    And I suspect that we will be able to read the sentence below again this time next year.
    “This year’s budget performance was undermined by tax revenues falling short
    of expectations as the recession deepened and unemployment rose beyond
    government forecasts.”

  • Anonymous

    Hi Josephine
    After the savage tax increases that have been introduced tonight I expect to see Portugal’s economy weaken further and for the whole sorry cycle to start again.

  • How is Portugal doing? She is trapped in a circle of austerity then economic decline and repeat | Adamastor |

    [...] Shaun Richards: There has been a recent turn in sentiment in some places on the situation regarding the Portuguese economy and today I wish to analyse the true position.  [...]

  • DaveS

    Well that currency devalued, and the BoE economic textbooks said that it would result in increasing exports and narrowing trade deficit.

    But strangely 5 years in to the devaluation, it hasn’t worked. BoE blame the Euro crisis, but what happens when the Euro devalues and we are in competitive devaluation with a desperate bankrupt Europe. And what about the Chinese and other developing nations, they are just going to stand aside ?

    The West can’t compete without lowering wages to a level that would trigger anarchy – I’m afraid the textbooks will need to be rewritten.

  • Anonymous

    Shaun, glad to see that you have made contingency plans! Back to your old home soon, it seems.

    As for Portugal, as you say, they can’t escape from the spiral by increasing taxes (which, I have to say, still look pretty low even after the proposed increases, and that assumes that they are all paid- improbable).

    Portugal’s long term problem, by no means unique, is that it wants a higher level of state services and general consumption than its underlying economy can justify. It was misled when it entered the Euro, or chose to hold the expectation that somehow joining a currency bloc would raise living standards dramatically at a stroke. Well it doesn’t. See Argentina of the mid 90′s, for example.

    There are a couple of options now, if we assume that the debt problem is sorted for them. The country could in theory go back to the standards of 2000 and tighten its belt. That’s not impossible but it will not be popular. Or a handsome fairy godmother, you know the one, could support Portuguese living standards where they are for the foreseeable future. However, the price being asked to deal with the debt situation is the former. I suggest that the EZ simply writes off the debts of the past against the fictitious financial assets of other EZ members, which would be a way out of the mess, though unpopular with the voters of contributing countries and especially their banks. The sweetener would be that it would not be allowed to happen again, that is, permanent support and the federal solution are put in place.

    The EU can go round this conundrum for ever, and still looks like taking its time. Meanwhile, why did all those massive sums for ‘regional development’ have no impact on the wealth of the recipient countries? We seem to have sent untold billions to Portugal and Spain and they have had no impact at all. I smell a rat.