Back in the days when the media will regularly using the acronym PIGS to cover the Euro area crisis then Portugal found itself at the forefront of the acronym. However the news flow has faded as its economic performance showed some signs of improvement as 2013 pushed into 2014. Unfortunately as 2014 progressed then the recovery phase showed hints of past problems for Portugal.
The Portuguese Gross Domestic Product (GDP) registered a year-on-year increase of 1.1% in volume in the third quarter 2014 (0.9% in the previous quarter).
So we note that Portugal was seeing economic growth of approximately 1% per annum especially if we add in the fact that the first quarter saw annual economic growth of 1% as well. Accordingly we find that if we took a trip in Dr. Who’s TARDIS to the middle of the last decade we would see a similar situation where economic growth trundled along at around 1% per annum. Such echoes of a troubled past where even the better years were not that good pose serious questions for progress in Portugal. The more hopeful annual rate of growth of 1.6% registered in the third quarter of 2013 has not brought in a push forwards rather a fade to what looks like what Bob Seeger was describing.
‘Cause you’re still the same
You’re still the same
Moving game to game
Some things never change
You’re still the same.
Why does this matter?
Bloomberg has calculated that since 2008 the Gross Domestic Product or GDP of Portugal has shrunk by 8%. So an annual rate of growth of the order of 1% would take 8 years to get Portugal back to where it began the credit crunch or somewhere around 2023. As we mull echoes of the lost decade(s) concept from Japan let me give you a comparison between 2003 and 2014. In the third quarter of 2003 the GDP of Portugal was 42.43 billion Euros at 2011 prices and in the third quarter of 2014 it was 42.41 billion Euros. On that basis Portugal has already experienced a lost decade and will experience two at current rates of economic growth.
Thus for all the official rhetoric of plans being “on track” it is quite plain that they are not or they are on a very grim track set to provide Portugal with two lost decades.
The official view
The latest forecasts from the Bank of Portugal are along rather similar lines. From its December Economic Bulletin.
This should translate into an annual average
rate of change of Gross Domestic Product (GDP)
of 0.9 per cent in 2014 and 1.5 per cent and
1.6 per cent in 2015 and 2016 respectively,
So even the official forecasts are only a little better and they hope for export demand to pull Portugal forwards whereas the latest quarterly figures tell a different story.
while net external demand presented a negative
contribution to the GDP quarter-on-quarter change rate
(-0.8 percentage points), after a positive contribution of
1.1 percentage points in the previous quarter, mainly
due to the increase of Imports of Goods and Services.
So in a nutshell recent economic growth in Portugal has been driven by domestic demand which has been followed by an uptick in import growth. Again students of economic history will see a familiar pattern rather than the changes promised by the Troika (IMF,ECB and European Commission) and the Portuguese authorities. We return again to the issue of the “internal competitiveness” economic model and the actual changes which have taken place.
For an economy which is relying on domestic demand then the latest retail sales data was worrying.
Retail trade turnover index registered a year-on-year change rate of 0.2% in November (1.0% in October).
Added to that both employment and hours worked fell. The message provided by this was backed up by the industrial production numbers.
Industrial Production year-on-year change rate was, in November, -2.0%, down by 2.0 percentage points from the previous month. Manufacturing Industry year-on-year change rate was -3.1% (-0.5% in October).
In terms of perspective the seasonally and calendar adjusted index for industrial production in Portugal was 88 in November where 2010 is the base of 100.
What about the national debt?
This is next on the list of issues for Portugal partly because of its size but partly because of its economic record. Large debt burdens can be ameliorated with economic growth but Portugal rarely manages much economic growth and has not done so in the Euro era. The state of play is summarised below by the Bank of Portugal.
As a result of these changes, the debt of general government was 219.2 billion euro in the end of 2013. This figure includes a revision of 5.6 billion euro, resulting from the adoption of the new European System of National and Regional Accounts (ESA 2010).
However what the new system added in terms of debt it more than took away by raising recorded economic output by a relatively larger amount.
In the same period, however, public debt as a percentage of GDP (128.0%) is lower than the one calculated under the previous European system of accounts (128.9%).
We can file that under more is less or under up is the new down. For those of you wondering about the methodological boost to economic output I have provided it below.
For Portugal, the impact Estimated having 2010 as a reference, is between 1% and 2%, which is essentially due to the effect of Research & Development capitalization.
Drugs were decriminalised in Portugal over a decade ago so that was not an issue.
In terms of the fiscal numbers then revenues are rising at an annual rate of 3.3% up to the end of the third quarter of 2014 and expenditures at an annual rate of 1.6%. Not quite the austerity promised is it? The total general government deficit has shrunk from 7.2 billion Euros in the same period of 2013 to 6.3 billion Euros.
The dog that has not yet barked
There was a period when it looked like the cost of repayments to the national debt would swamp Portugal but that trend to lower bond yields has bought time. As I type this the ten-year bond yield is 2.44% which feels like a land far far away to quote the film Star Wars from the 15% plus that was seen in early 2012. That is how the show has been kept on the road and a fair bit of credit needs to be given to the “everything it takes (to save the Euro)” speech from Mario Draghi in the summer of 2012.
However the can has in capital terms simply been kicked down the road unless there is a fundamental improvement in the real as opposed to the financial economy. Such moves give politicians breathing space which they then tend to use for their own political ends.
Let us first look at the glass half-full version of the Portuguese economy. Here we see economic growth that is slow but so far fairly consistent. Next if we look forwards we see that the fall in the oil price which has extended to below US $56 for a barrel of Brent Crude Oil will provide a boost to economic output as 2015 progresses. I note that generically the IMF estimates this boost will be of the order of 0.5%. Also the Euro which has dropped to a nine-year low earlier as it fell below 1.19 versus the US Dollar will be helping too, although it has fallen less against the other main currencies. So for once there are indeed favourable trends to observe which makes a nice change.
If we switch to a glass half-empty view then once the two boosts above fade then this looks all rather familiar. Domestic demand sucking in imports and low and slow economic growth have led in the past to the IMF being called into help Portugal rather than leaving it! Whilst the issue of the national debt is currently not a major issue on an interest basis (due to low bond yields) it is on a capital basis due to its size. Also as time passes the demographic situation in Portugal is worsening so there is a drip-drip weakening of the overall position or a Muse put it.
Our time is running out
Our time is running out
You can’t push it underground
You can’t stop it screaming out
How did it come to this?
The Euro area crisis has exacerbated this issue and back in August the Portugal News reported this on the subject.
The National Statistics Institute has this week revealed that Portugal has lost close to half a million youths in the space of just a decade.