Today sees the wearing in of the new Portuguese minority government. The situation has created a lot of media headlines and a Twitter hashtag of #PortugalCoup but it would not be the first country to ever have a minority government.It is a moot point to wonder if this would have been the state of play of Passos Coelho and his government had not been so pro Euro? But of the nations which got into trouble Portugal has been the model school pupil in terms of attitude all along. Quite how this will progress though does not look so clear as the electors gave the minority government 108 seats whereas the combined opposition parties can muster 122.
However as ever the economic situation is the priority here and let me open with the central issue which is that for some time now the Portuguese economy has struggled to sustain economic growth. Even in the better years it has managed GDP (Gross Domestic Product) growth of only 1% per annum. Back in April 2007 the Economist labelled it as a new sick man of Europe and of course that was exactly the wrong position to face what was about to happen next. But what it noted was instructive.
Look at any table of European economic data and Portugal stands out. GDP growth last year, at 1.3%, was the lowest not just in the European Union but in all of Europe…….Portuguese GDP per head has fallen from just over 80% of the EU 25 average in 1999 to just over 70% last year.
So we can see that Portugal underperformed its peers in the Euro era.
Since 2000 the Czech Republic, Greece, Malta and Slovenia have all overtaken Portugal in terms of GDP per head.
The response of the Euro area to the troubles was something with which we are now more than familiar.
The commission thinks Portugal’s sin was to let public spending soar out of control, pushing the forecast deficit in early 2005 up to 6.8% of GDP, the highest in the euro zone.
The Commissioner should have issued such edicts with a red face as it was none other than one of the people responsible Jose Manuel Barosso who was an ex-prime minister. Also of course he was then responsible for applying pressure on Portugal to raise VAT to 21%, raise the pension age to 65 and other austerity measures which slowed its economy just as it was about to face a crisis. Bad Timing.
Partly as a result of the economic travails Portugal has had demographic problems for some time where its best educated citizens have a high propensity to emigrate abroad. VoxEurope overplayed its hand with this in 2012 but you get the idea.
Will the Portuguese be extinct by 2204?
The long-standing problem was exacerbated by the credit crunch and Euro area crisis and the population dropped in 2010 and 11 by 55,000 each year. At some point on that road a place not far from me called Stockwell by most and St. Ockwell by estate agents acquired another name “Little Portugal”. Of course migration of the better educated and economic growth problems are now in a chicken and egg style circle. In its latest Bulletin the Bank of Portugal puts it like this.
it is worth noting that the total population and the working-age population decreased (by approximately 2.0 and 5.5 per cent respectively between the beginning of 2010 and mid- 2015), driven by the recent dynamics of migratory flows and the population’s ageing.
The other fundamental problem in Portugal is the concentration of so much economic power in a few families. As each crisis emerges from its chrysalis we invariably discover issues at yet another family owned business and rather disturbingly for the taxpayer the losses get socialised as they mull who got the profits. As Pink Floyd so eloquently put it.
Us and them
And after all we’re only ordinary men.
Me and you
God only knows it’s not what we would choose to do.
‘Forward’ he cried from the rear
And the front rank died.
The general is sat and the lines on the map
Move from side to side.
Portugal has plenty of economic links with Angola and as we mull which takes the lead these days there is the issue of Angola having pretty much the same problem.
If you want it put another way the Bank of Portugal summarises the issues here.
the correction of the inefficient allocation of resources accumulated during several decades
What about now?
There is a bit of ying and yang about the latest Bulletin from the Bank of Portugal so let’s start with the good bit.
Projections for the Portuguese economy point to 1.7 per cent growth of the Gross Domestic Product (GDP) in 2015
Also there are genuine signs of something that has changed for the better here.
there was an increase of approximately 10 percentage points (p.p.) in the weight of exports on Gross Domestic Product (GDP) between 2008 and the first half of 2015 (from 31 to around 41 per cent), amid strong growth of exports in volume (an increase of 25 per cent over the same period).
This is hopeful as trade issues have seen Portugal make trips to the IMF before. However currently imports on rising strongly too which brings echoes of a troubled past with it.
Underlying these projections is higher import penetration,
Also if the Portuguese look across the nearest border they see that they are again being eclipsed by Spain which has this morning declared an annual economic growth rate of 3.4%.
Yesterday we got the official surveys for the Portuguese economy which told us this.
The Consumer confidence indicator slightly diminished in October……In Manufacturing Industry, the confidence indicator slightly diminished in October. The Services’ confidence indicator decreased in the last month,
It looks as though manufacturing confidence weakened over the summer which is something that has become a pattern now. As to consumer confidence this is a long running series (1987) but it is hard to judge a series where the peak is -5.5! As we stand it is at -17.4% and the low has been -59.8.
We will have to see what happens going forwards but the economic climate indicator has dipped from 1.4 to 1.2. If we note that its average has been 1.6 since 1989 and remind ourselves of the issues above this looks well in the words of David Byrne.
Same as it ever was
Same as it ever was
If we look on the sunny side then the hope for Portugal is that it can continue with its export performance improvement. It will welcome the efforts of Mario Draghi to drive the Euro later and also will hope for more UK holidaymakers tempted by a near 1.40 exchange-rate. Also consumption will have been helped by a lower oil price and lower inflation. On the other side of the coin gains from crude oil processing will be hard to repeat at current prices and having 2% of your GDP from Volkswagen has its issues right now! Although I understand that the plant produces models so far not affected by the scandal.
Now let me introduce a consequence of Portugal’s problems which is its national debt of 129% of its GDP. Right now with Mario Draghi helping out by buying so far some 7.77 billion Euros of Portuguese bonds it is easy to see that there is no current problem with a ten-year yield just over 2%. But can Portugal regain ground in a debt sustainability sense as to do that it would have to grow consistently something it has consistently failed to do? After all it has a private-debt to GDP ratio of 255% according to the IMF as well.
So my conclusion is that it is a lovely country which I like very much but that it still needs to follow the advice of Tears for Fears.
You can change
I nearly forgot to add that I did an interview about Portugal for Australian public radio about 10 days ago. Here is a link to it.
You might like to note the implied view from Australia.