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Home > Blogs > Mindful Money > Portugal has left its recession but is still in an economic depression

Portugal has left its recession but is still in an economic depression

Portugal has left its recession but is still in an economic depression Mindful Money

I wish to discuss the economic situation in Portugal which I have not covered since the 28th of June. There is a reason for the gap which is that the Gross Domestic Product numbers for the second quarter were such a surprise to me that I have sent some questions to the Portugal Statistics about them. Sadly as they have not replied over a fortnight later I have assumed that they probably now will not do so.

The Announcement

Back on the 14th of this month this was released.

Comparing with the previous quarter, the Portuguese GDP increased 1.1% in volume.

This was a complete surprise but some care is needed as even with such quarterly growth Portugal’s economy is still smaller than a year ago as shown below.

The Portuguese Gross Domestic Product (GDP) registered a year-on-year change rate of -2.0% in volume in the 2nd quarter 2013 (-4.1% in the previous quarter), according to the flash estimate of the Quarterly National Accounts.

The first question we have is what mainly caused this improvement and we also get in the section I have emphasized why I emailed Portugal’s statistics office.

the significant acceleration of Exports of Goods and Services, partially due to the calendar effect associated to the Easter celebration (in 2012, it took place in April whereas in 2013 it occurred in March).

I inquired as to what they thought the size of this was. My estimate (h/t Roel_D) is that it transfers perhaps half of the growth back to the first quarter. So all of 2013 is now apparently showing some quarter on quarter growth on that basis/assumption. We will have to wait developments but the new official picture is that the export sector of Portugal has given it a boost.

The Portuguese economy

The end of last week brought a flurry of data about the Portuguese economy so let us examine it.

Retail Trade

This has been negative for quite some time in Portugal and is one of the best bellwethers for letting us know how domestic demand is performing.

The retail trade turnover index (seasonally adjusted and at constant prices) registered a year-on-year change rate of -2.3% in July 2013 (-2.6% in the previous month).

As you see it continued its decline in July and the effects spiraled out into the rest of the economy as shown below:

In July, the year-on-year change rates of the indices of employment, of the number of hours worked adjusted for working days and of wages and salaries were -4.6%, -6.1% and -5.8%, respectively (-4.8%, -5.1% and -5.9% in June, by the same order).

So the pattern is that the numbers are improving in 2013 on a monthly basis but not by enough to stop the falls compared with 2012.

Another way of achieving some perspective on all this is that in July the adjusted (seasonal and calendar) level of retail sales volume was 86.1% of that in 2005.

Industrial Production

These also showed a decline compared to a year ago.

Industrial Production year-on-year change rate was -2.3% in July, down by 4.6 percentage points from the previous month. Manufacturing Industry year-on-year change rate was -2.4% (1.2% in June).

We have some food for thought here about whether the recorded performance of the Portuguese economy in the first half of 2013 can be sustained. We would expect export growth to be picked up as part of the production numbers above and yet even so we see a sharp setback from the levels of June and indeed one which pushes Portugal back again to levels below those of 2012.

The underlying level of industrial production is now an adjusted (calendar and seasonal) 85.2 where 2005=100.

Also there was a hint of possible problems on their way as this was recorded in the latest trade figures.

nominal exports of goods diminished 1.2% in June, comparing with the same month of the previous year (change rate of 5.1% in May).

As ever it is dangerous to put too much reliance on a single month’s trade figures but it does seem to have been backed up by production in July.

Unemployment and employment

This area looks as though it is showing an improvement as the headline unemployment rate fell from 17.7% in the first quarter of 2013 to 16.4% in the second. However some perspective is required.

This value is up 1.4 percentage points from the same quarter of 2012

Also if we look at the change in Portugal over the past year there is a familiar issue particularly to readers in the United States as the participation rate has fallen from 61.2% to 60.2%. This means that some have left the unemployment numbers by giving up looking for a job rather than finding one and is also recorded by the category for inactivity rising by 63,400 over the past year. Also the participation rate itself is much lower than the one which has caused so much concern and debate in the United States.

The factors discussed above may also explain the reduction in youth unemployment (under 25) to 37.4% in July picked up by Eurostat but it remains alarmingly high.

Fears about the impact of emigration (usually by the better educated and younger) will not be helped by numbers showing a fall of 123,600 in the labor force over the past year.

Austerity is a complete mess

This remains a problem for Portugal as in spite of the efforts made so far her national debt continues to climb and her fiscal deficit has by no means reduced as either hoped or planned. This means that the Bank of Portugal thinks this now.

In turn, the projection for 2014 is revised downwards by 0.8 p.p., reflecting mainly the impact of the incorporation of fiscal consolidation measures subsequently presented in greater detail;

So even its optimism for 2014 has been reduced from an economic growth forecast of 1.1% to 0.3%. Those who follow such economic forecasts will find this to be more than a little familiar!

However last week the Constitutional Court of Portugal gave some of the planned austerity measures a shot across the bows by ruling them to be illegal. The impact will be approximately 400 million euros in both 2014 and 2015.

As this is the third time that it has made such a decision there is now quite a problem between Portugal’s judiciary and its government which needs a resolution and preferably soon. Otherwise the country is beginning to look somewhat ungovernable. Also it reminds us one more time of the gap between treatment of workers in Portugal’s public-sector and those in its private-sector.

The novelty of car-free roads

One of my favorite songs came immediately to mind when I read the Financial Times report last week that many of Portugal’s newly built motorways were empty. Why? They are toll roads and the Portuguese cannot afford to drive on them because they are getting poorer as the toll charges rise. According to the report motorway traffic fell by 12% in 2012 and a stunning 68% in the first quarter of 2013.

This poses quite a few questions as we wonder one more time what economic output as measured by Gross Domestic Product tells us. Empty houses in Spain, empty hotels in Ireland and now empty roads in Portugal. Good value for 96 billion euros of European Union structural funds provided since 1986?

So one more time here we go.

We’re on a road to nowhere
We’re on a road to nowhere
We’re on a road to nowhere
We’re on a road to nowhere


As I review the situation in Portugal I am reminded of the situation in the 1920s and 30s where there were ebbs and flows in the Great Depression. To my mind that is exactly the correct theme for Portugal which has recorded a move out of recession but remains firmly trapped in an economic depression. Before the credit crunch such a thing would barely have seemed possible but now sadly Portugal is getting the opportunity to understand what a great depression means.

Also Portugal has been out of phase with the rest of Europe with her recorded sharp improvement in the first half of 2013 followed by an apparent dip just as the rest pick-up! The upgrade of the Galp oil refinery has perhaps played its part in this but where will the next boost come from? Whilst I like Portugal very much I can still see no alternative to it having to take a second bailout from its euro area partners.

At least the euro exchange rate has moved marginally downwards against the UK pound sterling (1.176) as we wonder when Real Madrid will exchange its 100 million euros to be spent on Gareth Bale to pounds.

This article was written by Shaun Richards and originally published in Mindful Money under the title: Portugal has left its recession but is still in an economic depression

Tags: demographics , depression , Euro zone Crisis , General Economics , manufacturing , Portugal , recession
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