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.