Today the circus which is what meetings of the Eurogroup have become will take place one more time. During it Portugal will press her case for receiving a change to her bailout terms so that she is being treated on the same terms as Greece. Those who have ever watched daytime UK television will wonder if Ocean Finance set out a business model ahead of its time as Portugal tries to get lower monthly repayments by extending the term of its bailout loans! Or to put it another way increasing the total amount that has to be repaid as the poor battered can gets kicked one more time.
Why is this required?
If you listen to Portugal’s leaders or indeed to Euro area officials you might wonder why this is required in a country which is “on track”. After all if everything is going to plan why is a change needed? At this point even those who give a cursory glance to Portugal’s economic circumstances will see that the bailout has in fact gone disastrously wrong. On February 14th I discussed Portugal’s latest economic growth figures.
Comparing with the previous quarter, the Portuguese GDP diminished 1.8%
So we saw an acceleration of her already serious economic decline.
In 2012, the Portuguese GDP diminished 3.2% in real terms (change rate of -1.6% in 2011).
Under the economic fantasies of those applying austerity and the terms of the bailout it was not supposed to be like this. The downturn has hit Portugal particularly hard because even in what were the relatively good years before the credit crunch hit she had only managed an anaemic economic growth rate. So there has been little fat to trim and the austerity knife has quickly cut into bone,sinew and muscle. In its latest bulletin the Bank of Portugal put it this way.
This development implies a cumulative decline of 7.4 per cent in gross domestic product during the 2009-2013 recession….In cumulative terms, the drop in domestic demand during the 2009-2013 period is expected to be approximately 17 per cent.
What else did the Bank of Portugal tell us?
Does the future look bright? Unfortunately not if we look at the latest data on vehicle sales.
In the three month period ended in January 2013, sales of light passenger vehicles, including four-wheel drive, decreased by 26.1 per cent, in year-on-year terms (-30.3 per cent in the fourth quarter of 2012
The numbers for light commercial vehicle showed a 53.9% fall on the same annual basis although heavy commercial vehicle sales were unchanged for a very weak overall picture and an extreme divergence. These numbers are even worse than the ones for Italy I reviewed on the 19th of February.
Fiscal problems mount
The economic slowdown discussed above has led to a collapse of tax revenue overall which has happened in spite of higher tax rates.
State tax revenue declined by 6.8 per cent in 2012, standing €602 million below the estimate included in the Report of the SB2013. The collection of direct taxes decreased by 9.5 per cent, reflecting the 7.6 and 17.3 per cent reductions in the receipts from the personal and corporate income taxes. The receipts of indirect taxation recorded, as a whole, a 4.7 per cent decline in 2012.
So the austerity programme has been torpedoed by a fall in economic activity leading to a collapse in tax revenue and also upwards pressure on social security spending from higher unemployment payments. Accordingly the Bank of Portugal thinks this happened to the fiscal deficit.
The State deficit on a public accounts reached €8898 million in 2012, to be compared with €7044 million in the previous year
Yes the same state deficit which we keep being told is “on track”! Also the water is muddied by privatisations such as Lisbon airport,bank pension transfers and the late payment of bills.
The bottom is another austerity fail as its primary objective was supposed to be a reduction rather than another increase in the fiscal deficit! To fail like this they have also depth charged the underlying economy in what looks like a type of economic vandalism.
Bank Lending continues to fall
In December, the annual growth rate of loans granted to the resident non-monetary sector (excluding General Government) by resident banks stood at -4.5 per cent.
The Bank of Portugal tried to put a brave face on this by pointing out that the rate of fall slowed slightly in December.
If we move from internal issues we see that the external situation continues to be harder for Portugal as even the neutral language of central bankers illustrates.
The nominal effective exchange rate of the recorded an appreciation. Between the end of 2012 and the 18th of February, the euro appreciated 2.5 percent in nominal effective terms.
This underlies the way that Portuguese exports have stooped growing as we see what was a bright light blinking and the fading.
Retail Sales continue to fall
The retail trade turnover index (seasonally adjusted and at constant prices) registered a year-on-year change rate of -3.7% in January 2013 (-9.4% in December 2012).
So whilst there is an improvement we see that the Christmas season which is obviously the major season for retailers was very grim. Such a grim period will have repercussions throughout the economy.
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 -5.6%, -6.3% and -8.4%, respectively
The underlying index is 77% of the the 2005 base.
What about industrial production?
The Industrial Production Index year-on-year change rate was -1.5% in January, up by 2.8 percentage points from the rate observed in the previous month. Manufacturing Industry year-on-year change rate was -3.4% (-3.3% in December).
If we adjust for calendar and seasonal effects then the underlying number is 85% of the average for 2005.
What about her housing market?
We get to learn a lot less about this but we had been given a glimpse by Portugal Statistics.
The average value of housing bank appraisals in Portugal stood at €1008/sq meter in January, down by 1.1% from the value observed in December and 5.2% in year-on-year terms (in the previous month these change rates were -0.2% and -5.1%, respectively).
Obviously using bank appraisals is not a perfect guide and I wonder about the recorded rises until the spring of 2011 when the index hit 921. But the drop to 808 now or 12% from then if accurate seems to be a precursor of more to come as I struggle to think of any optimistic thoughts for house prices in Portugal’s economic circumstances.
After reading the details above on Portugal’s continuing economic decline you may read the statement below by Her Finance Minister Victor Gaspar somewhat quizzically.
Portugal has already corrected the main macroeconomic imbalances and structural barriers that were at the origin of this serious crisis
Well you would have the Bank of Portugal for company as it thinks.
The economic development challenge depends on the acceptance by economic and social agents of the need and the benefits of any reform ensuring welfare compatible with the maintenance of institutional consensus and social cohesion.
So it thinks that it has not really started. Oh Dear! Even worse Victor Gaspar used unemployment as an example so let us look for the signs of that being corrected.
The unemployment rate estimated for the 4th quarter of 2012 was 16.9%. This value is up 2.9 percentage points from the same quarter of 2011 and 1.1 percentage points from the previous quarter.
If that is reform well might the Portuguese scream and shout like Britney that they do not want any more of it. Instead Mr Gaspar and his colleagues have already tightened the austerity noose in 2013 and I fear for what may happen as another year of contraction of the order of 3% will lead to even more suffering.
One oddity in many ways is the improvement in Portugal’s government bond market. It has been on a heady surge with her ten year bond yield at 6.39% being less than half of what it was a year ago. If you were invested well done. But looking forwards whilst there is an international thirst for yield still I can only see Portugal having to copy Greece in one more area before this is over and that is in taking a haircut on her debt. Her national debt to economic output ratio shot up by 10% over the previous year to 120.3% as of the third quarter of 2012 and we know that both sides of the equatio have deteriorated since. frankly it now looks out of control.