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Portugal (2013) - Many Rivers to CrossReto Huenerwadel and Gorgy Kovacs, Zurich and London.This article appeared in the January 2013 issue of Current Economics with permission of the author. Key Concepts: Economic Growth| Fiscal Consolidation| Bond Market Key Economies: Portugal |
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European peripherals have managed to stay out of the headlines at the beginning of 2013, and Portugal is no exception. The International Monetary Fund (IMF) approved the disbursement of the next loan tranche to Portugal of €838.8mn. Among the encouraging signs, the relentless efforts towards fiscal consolidation, which we have highlighted on various occasions, and following the latest drop in 10-year Portuguese government bonds (OT), it is time to take the pulse of Portugal in terms of how much growth momentum there is left, its impact on the fiscal situation and, not least, its implications for financial markets ahead of a potential government bond auction later in the second half of 2013. To cut a long story short, despite the positive signals from the bond market, the situation remains challenging on all fronts for Portugal. Specifically, the fiscal target remains a daunting task for 2013 and beyond, despite the 2012 softening by the European Commission – the latest target is for a 4.5% deficit to GDP in 2013, to be followed by prints below 3.0% in 2014. Good Start to 2013 For Portugal Unsurprisingly, the IMF has approved the next tranche
of disbursement for Portugal, totalling €838.8mn, earlier this week,
and made positive references to its continued fiscal efforts. At a time
of slow growth, not least in the eurozone, and fully aware of the increased
political cross-fire domestically, the IMF views the Portuguese programme
as broadly on track. NO Positive Growth Contributor Left in The Economy Nothing highlights the difficulties of the Portuguese economy at the outset of 2013 better than a quick glance at GDP growth (-3.5% y-o-y and -0.9% q-o-q in Q3 2012) and, in particular, the contributions to overall growth on the expenditure side as of Q3 2012. The small positive growth momentum in the form of exports in early 2012 had virtually disappeared later in the year. All other subcomponents have been adding negatively to Portuguese GDP for some time already. It thus comes down to lower imports (see Chart 1) to support GDP growth. Portuguese output has now declined by more than 6.5% from its peak back in Q4 2007. As such, Portuguese GDP has been trimmed to levels last observed back at the beginning of the new millennium. The Q3 2012 GDP release thus concludes the second full year of consecutive negative quarterly growth rates.
Chart 1: Growth Contribution Real GDP - Expenditures Source: INE, UBS
Chart 2: Real GDP Levels Source: INE, UBS
Private Consumption As Main Drag on Growth To state the obvious, the continued and ongoing fiscal
consolidation measures have had the biggest negative impact on private
consumption so far. Whilst clearly being the biggest drag on Portuguese
growth for one year, it is also true that the biggest drop in private
consumption was back in Q4 2011, when public sector salaries experienced
a big cut. This shock is likely to have worked its way through the statistics
by Q4 2012, and – while we expect private consumption to contribute
negatively to overall growth again – there is reason to believe
the worst is already behind us with respect to negative growth contributions
from this particular GDP component. What Does Not Work For Portugal at the End of 2012 While technical factors such as base effects may temporarily bring some support to private consumption and hence overall growth in Portugal, a decisive turnaround for the better critically relies on an improved labour market. For as long as wages in the services sector drop by more than 10% in just one year, and with unemployment still solidly on the rise – both among young people and overall – weak quarterly growth rates in private consumption are likely to be the norm for longer.
Chart 3: Wages Source: INE, UBS
Chart 4: Unemployment Rate Source: INE, UBS
Portuguese Restructuring Has Reached the Service Sector
Keep in mind, too, that even after the latest adjustments, the services sector accounts for around 66% of those employed overall, with a large part of that 66% employed in the public sector – roughly 22%. This compares with a share of public sector workers of more than 30% back in 2008. Jobs in Industry (Outside of Construction) and Agriculture Are Best Protected
The Challenges For the Service Sector Revisited
Chart 5: Employment Levels Across Main Sectors Source: INE, Banco de Portugal, UBS
Chart 6: Share in Employment Source: INE, Banco de Portugal, UBS
Relentless Fiscal Efforts Start to Pay Off
Troika’s Fiscal Targets Remain Within Reach
Keep in mind that the European Commission forecasts Portugal’s structural deficit to be just around 4% of GDP in 2012. This is solidly better than the 2003-07 average of 5.1%.
Chart 7: Overall Deficit as a Percentage of GDP Source: DGO, INE, UBS
Chart 8: Cumulated Primary Balance Source: Ministry of Finance, UBS
Chart 9: Unemployment Expenses Source: Ministry of Finance, UBS
Although the Portuguese fiscal situation has come a long way – particularly in light of the growth challenges nationally and globally – further measures are needed to bring Portuguese debt dynamics under control for good. With the fiscal consolidation measures in the 2013 budget heavily tilted towards tax increases, and not least in light of the elevated number of public sector workers, any future consolidation efforts will likely have to target spending cuts in the public sector.
Chart 10: Fiscal Position - Revenues Source: Ministry of Finance, UBS
Chart 11: Fiscal Position - Expenditures Source: Ministry of Finance, UBS
Fiscal Credibility Remains Key For Portugal
So far, the decisive measures taken by the Portuguese government alongside the efforts by other European institutions, most notably the ECB, have been viewed favourably by financial markets, resulting in Portuguese government bond yields edging consistently lower. At a level of just above 6%, the yield for the 10-year bond has moved back down to levels last seen in 2011.
Chart 12: Outstanding Portuguese T-Bills Source: IGCP, UBS
Chart 13: Portuguese T-Bills Yields Source: IGCP, UBS
Encouraging Signs From the Markets
Return to Capital Markets As Overriding Target For 2013
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