The economy of Portugal has been a regular feature in my analysis. After a grim period it has managed an improvement but in spite of the fact that the position should be set fair struggles appear to remain. Only yesterday the German Chancellor Angela Merkel praised it as an economic success story rather ironically on the day that the economic data raised questions about this. Indeed even the International Monetary Fund which has plenty of skin in the game via its involvement as part of the bailout troika – I believe they are still called a troika in Portugal if not in Greece – has its doubts as expressed in its statement after it latest visit.
The output recovery has so far been tepid. A recovery led by private consumption raised growth to about 1 percent in 2014.
That echoes because that is pretty much the same rate of growth that got Portugal into its current mess. What I mean by that is that it struggled to grow at a faster rate in the better pre credit crunch years and so it is hit hard when the post credit crunch contraction arrived. Of course now after all the pain and rises in “internal competitiveness” everything is supposed to be better is it not?! Accordingly I start to wonder if the estimate below will be as good as it gets for Portugal.
In 2015, growth is projected to accelerate to around 1½ percent, aided by a much more favorable external environment.
Favourable economic winds
The economic situation has a lot pushing it forwards right now. A major push will have been provided by the fall in the oil price that in terms of the Brent Crude Oil benchmark which at circa US $56 is some 48% lower than a year ago. The situation will be helped by the fall in the exchange-rate of the Euro with the trade-weighted measure having fallen from 104.43 a year ago to 91.32 yesterday. I guess the Portuguese tourist trade will have particular hopes for benefits from the fact that at 1.37 the UK Pound is some 13% stronger than a year ago. Of course the exchange-rate fall against the Euro offsets some of the oil and commodity price fall benefits but overall it is a stimulus.
Added to it have been the various measures of the European Central Bank to loosen monetary policy. It announced yesterday that it has so fat spent some 108.52 billion Euros on its latest round of QE (Quantitative Easing) bond purchases. It remain to be seen if Portuguese mortgage and borrowing rates fall in response to this but the rates at which the government borrows have fallen substantially. It is plainly a market distortion to have a country which has a substantial default risk to have a ten-year bond yield of 1.74% but there you have it.
The Labour Market
This is something about which the IMF has its concerns
At this moderate pace (of economic growth), a significant portion of the existing labor slack would not be absorbed by job creation, especially in the lower-skilled segment of the labor market. Instead, workers would likely lose their attachment to the labor market and give up searching for jobs, or migrate to look for work in other countries.
So Portugal would struggle to employ its population especially at the lower-skilled and and so many would migrate abroad. Plus ca change c’est the meme chose rather than the improvements promised by the troika. What did Portugal go through all the economic pain for?!
This added to the concerns as you can see below.
The unemployment rate estimate for February 2015 was 14.1%. This value is up 0.3 percentage points from the one estimated for January 2015.
Actually it is up 0.5% from the 13.5% recorded in November 2014 which in a period of supposed recovery is troubling to say the least. If we move to the employment situation which is more of a leading indicator we see a similar disappointing situation.
In February 2015, the employed population was estimated to be 4,399.9 thousand people, decreasing by 0.3% from the previous month (less 11.1 thousand people).
Indeed if we look deeper into the numbers we see that the employment gains in Portugal over the past year now only total 12,000. You would think that the favourable economic winds discussed above would prevent a fall but also we have to take account of the fact that the numbers should not be where they are.
The IMF has its doubts
If we look away from the official reports and go to the IMF’s own blog we see that it has its own doubts as to how much economic reform has taken place in Portugal.
Reforming product and labor markets could lead to a better allocation of productive inputs across sectors and sizable increases in growth (Figure 2). For example, if Italy and Portugal were to eliminate distortions within the next decade, they could boost productivity growth by at least 1½–2 percent per annum.
Actually it is quite an indictment of the IMF’s own reform process and something of an admittal of defeat.
This too has disappointed in the latest data.
Industrial Production year-on-year change rate was, in February, -1.0%, up by 0.3 percentage points from the rate
observed in the previous month. However, Manufacturing Industry year-on-year change rate was -2.0% (-0.1% in
Portugal Statistics has tried to put a positive spin on it but the numbers are weak. Of course the numbers for oil refining will not have helped but seeing as they were claimed in the boom years this is now the downside.
What about the banks?
These days modern economic policy seems to both start and stop with the banks but this from the Bank of Portugal summarising the state of play at the end of 2014 does not seem especially optimistic in spite of the spinning.
Banking system total assets continued to gradually decrease
The flow of credit impairments decreased, though remaining at a high level.
In 2014, profitability of the banking system improved (excluding BES and Novo Banco) remaining, however, slightly negative in 2014;
So things go better apart from when they got worse! Actually credit impairments rose to 7.7% of gross loans from 6.2% for example. Also solvency and capital ratios deteriorated due to this.
the revision of the actuarial assumptions followed by some banks’ pension funds.
Accordingly it is not a great surprise to note that Portuguese businesses did not seem to get great support from the banking sector in 2014.
Non-financial corporations’ debt in the third quarter of 2014 has decreased by about 4 p.p. of GDP when compared to 2013,
The situation in Portugal is troubling is this is as good as it gets then it has gone thorough all the economic pain and adjustment to perform rather similarly to how it did before. This time around it does so with a public debt some 130.2% of Gross Domestic Product so it is weaker indeed much weaker. What is required is a few years of economic growth at around the 3% per annum just reported this morning in the UK. But that seems a long way away as there is little sign of it. Even worse rising unemployment and falling employment raise spectres of the malaise that Portugal has only just escaped which will eventually ram into the longer-term problem that Portugal faces of an ageing population exacerbated by emigration of the youngest and brightest. It would be interesting to know how many Portuguese there now are just a few miles from me in “Little Portugal” otherwise known as Stockwell.
Let us hope that the better numbers such as a rare current account surplus seen in 2014 or that fact that real wages must be boosted by low and indeed negative inflation will prevail. But they have a lot of work to do.