The real fiscal cliff hits Portugal in 2013

The world’s media has its mind fixed on the so-called fiscal cliff issue in the United States. However if we cross the Atlantic to the Iberian Peninsular we find a country which has a much more genuine fiscal cliff to face as 2012 opens and it does so from a much weaker base. She will impose swinging tax increases on her economy in an attempt to get closer to the Euro area austerity target of a fiscal deficit on 3% of her economic output as measured by Gross Domestic Product. At least the US economy has some forward momentum to perhaps lose whereas the latest numbers for Portugal showed us this.

The Portuguese Gross Domestic Product (GDP) registered a year-on-year change rate of -3.5% in volume in the 3rd quarter 2012 (-3.1% in the previous quarter), corresponding to a downward revision of 0.1 percentage point comparing with the Flash Estimate.

That was the eighth quarter in a row recording a decline and this comes on the back of weak overall growth in the Portuguese economy in what were supposedly the good years.

What is happening in Portugal now?

If we look into the detail of the GDP statistics above we see two clear influences. Firstly domestic demand is in a depressionary situation.

The domestic demand recorded a less negative contribution for the year-on-year change rate of GDP, which shifted from -8.7 p.p. in the 2nd quarter 2012 to -7.4 p.p. in the 3rd

It is a bit grim when -7.4% is considered an improvement! Against this the external sector has done well although it is now slowing.

The contribution of net external demand decreased to 3.9 p.p. (5.6 p.p. in the 2nd quarter 2012),

If we look into this we see that whilst Portugal has exported more much of the improvement here has come from falling imports due to her weak domestic demand levels.

Households are deleveraging

Reflecting a strong reduction in consumption, the household savings rate reached 11.2%, 1.1 percentage points (p.p.) more than the observed in the year ended in the 2nd quarter

Companies are investing less

The net borrowing of non-financial corporations was 3.7% of GDP, decreasing by 0.6 p.p., mainly reflecting the contraction of both investment and compensations of employees

The impact on the Government’s fiscal deficit has been limited

In the first three quarters of 2012 the General government’s net borrowing stood at 5.6% of GDP, while in the same period of 2011 it was 6.7%.

The problem is that the improvement has involved several one-off measures. In the UK that is usually likened to selling off the family silver. The main move has been a transfer of bank pension funds to the state which has continued to benefit the numbers in 2012. The Portuguese government also hopes that Eurostat will allow it to use the money raised from last week’s sale of airport operator ANA to reduce the deficit. But of course as time passes there will be fewer and fewer such opportunities and eventually Portugal will have to face up to a position which on an underlying basis is worse than the one being presented.

What happens on January 1st?

As of tomorrow income tax rates will rise in Portugal. There are various increases set to start but overall the income tax take is set to rise on an average from 9.8% to 13.2%. This is not in itself that high if we look at international comparisons as if we allow for social security contributions the total take rises to around 25%. However there is a problem highlighted by the most recent data on public revenue from the third quarter of 2012.

The evolution of revenues was primarily affected by the significant reduction of taxes and social contributions. In fact, social contributions decreased 6.8%, taxes on income and wealth declined 5.6% and taxes on production and imports declined 4.9%.

As you can see tax revenue is already falling so raising tax rates looks likely to disappoint in terms of raising extra revenue. Put another way Portugal may already be on the diminishing returns section of the Laffer curve as for example the revenue from the rises in Value Added Tax (main rate now 23%) have disappointed too.

Also this represents something of a strategic retreat by the Portuguese authorities as the original bailout plans involved spending taking the brunt of the pain and as you can see taxes are now at the front of the list.

The Housing Market is weakening too

On Friday I examined the problems faced by the housing market in Spain and we can see from the numbers below that Portugal has its crisis brewing.

The average value of housing bank appraisals in Portugal diminished 0.5% in November when compared with the previous month, standing at €1021/sq meter. The year-on-year change rate was -6.2% (-6.1% in the previous month).

This is in spite of the fact that for existing mortgages the cost of borrowing is often very low.

The interest rate implicit in all contracts of mortgage loans to households for house purchases was 1.701% in November,

However in a familiar theme banks seem to be charging a lot more for new mortgages.

For the contracts signed over the last 3 months, the implicit interest rate was 3.532% in November

Government bond yields have fallen

One relatively bright spot for Portugal has been the rises in the price and fall in the yields on her govenrment debt. Her benchmark ten-year yield is now 7% which compares with over 13% at the beginning of the year which then rose to over 17%. She even managed a bond swap which reduced the amount of the bond next to mature.


So as I review prospects for Portugal and her economy for 2013 I fear that she will continue on the same trajectory as she did in 2012 with a contraction of 3/4% looking quite possible again. The official view of a 1% decline (European Commission and IMF) seems very optimistic to me.

So her population can expect yet more economic pain and  the objectives of getting her fiscal deficit and national debt under control seem as far away as ever. It is a very sad story to which we seem likely to add another grim chapter. Like a dog chasing its tail the ruling class in Portugal seem to have lost all sense of perspective.

Moving into 2013

On a happier note overnight has seen a better purchasing managers survey for China. However if we look back to this time last year we see that the world economy faces many of the same challenges that it did last year. In my home country the progress made on the subject of bank reform can be summed up by this announcement.

Hector Sants has been an outstanding leader of the Financial Services Authority during the most challenging of times.

Yes ignoring the Libor scandal amongst others apparently makes you not only eligible for but actually to receive a knighthood. Not to forget moving to a job at one of the main players in the Libor scanadal Barclays. If you wished to make it look like our system is corrupt that is pretty much the way to go about it….

I have emailed my Member of Parliament Jane Ellison to enquire as to whether there are any plans to give Fred Goodwin a Peerage? I will let you know if and how she replies.

I will be back on Wednesday and in the meantime would like to wish all my readers a Happy New Year.

This entry was posted in Euro zone Crisis, Financial crisis, General Economics, Recession, Uncategorized, Yield and tagged , , . Bookmark the permalink.
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  • Anonymous

    I can think of a few more gongs:
    Fred Goodwin’s is for services to trough-filling (his own)
    How about Tony Blair for services to war-mongering?
    Gordon Brown for services towards saving the world (not)

    Happy New Year to all

  • Rods

    Hi Shaun,

    Next year will just be another lost year fro the PIIGS and most of the rest of the Eurozone joining them as the whole area will be in depression. The Euro problems can will be kicked down the road at any cost until after Merkel is reelected. After this the Eurozone tax payers are going to have to cough up for a 50%+ haircut on the 55% and rising Greek debt they hold to make the Greek debt sustainable. I’m sure the Spanish banking sector will produce a few column inches of text over the next year for all the wrong reasons and Hollande will secure his place in history as a text book example of how quickly a group of politicians can crash an economy.

    I expect another lost year for the UK as well with stagflation at best. Any growth is any sectors I’m sure will be offset by an accelerated loss through off shoring of energy intensive heavy industry, where we have some of the world’s highest energy prices and from April next year the most expensive carbon trading costs.I’m sure the new unemployed will appreciate these jobs going to the US and China where they are not so stupid in signing and gold plating treaties for this climate change myth.

    The US will survive the fiscal cliff, which will provide some sort of growth hiccup the size of which will depend upon any deal, but cheap shale gas and oil prices will mean the economy will continue to recover and I expect it to be in better shape by the end of 2013 than it is now.

    It looks like China and the rest of Asia are going to avoid a hard landing and will continue to grow. With a new government Japan is going be interesting to watch.

    I wish you Shaun and all of the other contributors on this blog a happy, healthy and prosperous 2013 and look forward to reading all of your words of wisdom in the coming year.

  • forbin

    Hello Rods,

    I agree with most of what you have said – except the bit about cheap oil.

    Its still not cheap !

    And won’t be for a host of reasons , cost of marginal oil production is going up for one and Chin-India consumption for another……..the amount of tradeable oil on the open market is shrinking…….

    As for nat gas well there’s the dynamic between extraction costs there and market availability ( the effect to my mind is that USA nat gas is effectively stranded) . Baring unforseen events (!) I expect it to be actually stable but over the three year period I expect nat gas to rise again in the USA.

    Energy needs to be cheap to get the USA going in the strong growth way needed to pay off the debt bubble – I see no real indications of this.

    So 2013 will be pretty much like this year – no growth ( 2/3% range) for the UK , theres been no debt restructing , no house bubble burst , in many ways this looks like the 1870′s in that respect , not like the 1930′s recession/depression.

    Nothing happened to the banks – reform is badly needed here – for all Euro countries but I see no will to do it for fear of crashing the system. life support on – zombie state garanteed!

    There’s no plan I see thats in motion to change any of this

    no leader of great standing

    no policies of wisdom

    oh well,

    meet the new year – same as the old year!


    PS: Happy New Year to all and to Shaun, thanks for the great blog – may your year improve even if the economy does not !

  • Palaki

    Good comments on Portugal and much more realistic than the ‘Euro spin’ we hear in the main stream media. I can only hope that the ECB comes to it’s senses in 2013 and lowered the value of the Euro to give the peripheral countries some growth prospect in the new year. As I mentioned in comments attached to your previous post, it is ludicrous that the currencies of Portugal, Spain and Greece (the Euro) is so strong where previously they would have substantially devalued. Failing that I fear a long protracted decline is the alternative – as do my contacts in these countries. Not a happy prospect .

    Wishing you and all the folk who comment here a happy and prosperous new year!

  • Rods

    Hi Forbin,

    I agree with you on the oil price, just wishful thinking on my part, I guess!

    I was amused that on a Freedom of Information question that the Government say they are prepared for Zombies, just Zombie banks and economy to go then!

    Get your popcorn ready for the last three months of 2013 after Melkel has been reelected as real German Euro and EU intentions will then become apparent.

  • John

    Happy New Year to everyone.

    How much pain will the people in the Med region actually take?

    I cannot see the populations having infinite patience with austerity. At some point, they will seek alternative measures, perhaps even developing their own local currency [like the Lewis pound] for trading amongst themselves, given that they are being denied access to euros. This might then point the way out for the state – leave the euro. This could cause enormous trouble to the euro system, but then why should they care?

  • » The real fiscal cliff hits Portugal in 2013 | Mindful Money

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  • Philip Duval
  • Shaun Richards

    Hi Rods and Forbin

    I think that it was one of the lessons of 2012 that the oil price (Brent crude front month future) ended higher by just under 4% at US$111.27 per barrel than it started the year.
    Back to the commodity inflation demand deflation theme..

  • Shaun Richards

    Hi Pavlaki

    The currency issue is being added to by the falls in the Yen. As of last nights close it was at 114.61 Yen to the Euro which means that the Euro has risen by 15% over the past year. That is exactly what Portugal and the others do not need right now….

  • Shaun Richards

    Hi John
    What happens next depends on how quickly the population realises not only what is happening but what is likely to happen. Official forecasts always predict an improvement twelve months out as a way of sugaring the austerity pill but if Greece is any guide that has not happened yet.
    The respective political classes are however seemingly tied inot the Euro system.

  • Shaun Richards

    Hi Philip
    Thank you for the link which I will take a look at and welcome to my part of the blogosphere.

  • The real fiscal cliff hits Portugal in 2013 | Adamastor |

    [...] The world’s media has its mind fixed on the so-called fiscal cliff issue in the United States. However if we cross the Atlantic to the Iberian Peninsular we find a country which has a much more genuine fiscal cliff to face as 2012 opens and it does so from a much weaker base.  [...]