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A "flash" estimate shows that there was a sharp contraction in Portuguese economic activity during the second quarter, while the unemployment rate reached a new record high during the period.
IHS Global Insight Perspective
Portugal's economy shrank by 1.2% quarter-on-quarter (q/q) during the second quarter of this year, following a modest contraction of 0.1% during the previous quarter. Meanwhile, the unemployment rate reached a new record high during the same period.
The Portuguese statistical office has not released a breakdown of the figures alongside the "flash" estimate. However, its press statement mentions that the annual contraction in activity was driven by a negative contribution from domestic demand (and investment in particular), while net foreign trade continued to make a positive contribution to the economy.
The second half of the year will continue to be extremely challenging as the economy will be hit by tight fiscal and credit conditions, a deteriorating labour market, tensions at the Eurozone level, and muted external demand.
A "flash" estimate released by the National Institute of Statistics (INE) reveals that activity in the Portuguese economy contracted at a markedly accelerating pace during the second quarter of 2012. Specifically, GDP—on a seasonally adjusted basis—contracted by 1.2% quarter-on-quarter (q/q) during the April-June period. This followed a modest fall of 0.1% q/q during the first three months of the year. Compared against the second quarter of last year, output waned by 3.3%, marking the sharpest annual contraction since the second quarter of 2009. Portugal's economy has been contracting, on a quarterly basis, since the fourth quarter of 2010 and is currently 6.4% below its pre-crisis level in 2007. The INE has not released a breakdown of the figures alongside the "flash" estimate. However, its press statement mentions that the annual contraction in activity was driven by a negative contribution from domestic demand (and investment in particular). Meanwhile, net foreign trade continued to make a positive contribution to the economy during the second quarter. However, this was the result of a sharp contraction in imports, as export growth decelerated vis-à-vis the previous quarter. The INE will release the detailed figures on 7 September.
Meanwhile, the INE has released more negative news, this time concerning the labour market. The non-seasonally adjusted unemployment rate stood at 15.0% during the second quarter, up from 14.9% during the previous quarter and 12.1% during the second quarter of 2011. The second-quarter reading is the highest since the quarterly unemployment figures were first compiled in 1983. The number of people in employment waned by 4.2% year-on-year (y/y) during the second quarter, while the number of unemployed jumped by 22.5% y/y. The labour force dropped by 0.9% y/y during the second quarter, preventing a sharper increase in the unemployment rate. The unemployment rate among 15–24-year-olds sat at 35.5% during the second quarter, down from 36.2% in the same period last year. Meanwhile, the long-term unemployment rate—that is, those who have been looking for a job for more than a year—sat at 8.0% during April-June, up from 6.7% during the same period in 2011.
Outlook and Implications
The second-quarter figures illustrate that the adjustment process will be far from painless, although an acceleration of the recession is not surprising given the modest contraction experienced during the first quarter. Conditions are expected to remain extremely challenging during the second half of the year. Domestic demand will continue to be a significant drag on growth, hit by high and rising unemployment, tight fiscal and credit conditions, and still very low business and consumer confidence levels. Meanwhile, external conditions are not expected to remain favourable. Indeed, demand among Portugal's Eurozone trade partners is likely to be muted over the second half of the year. On a more positive note, the recent weakness of the euro should eventually help to improve the competitiveness of Portugal's exports outside the Eurozone, which have increased, as a share of total exports, since the start of the crisis.
Events at a Eurozone level will also have repercussions in Portugal. IHS Global Insight currently forecasts Greece to leave the Eurozone in mid-2013, although this could happen earlier if the "troika" of international lenders—the EU, European Central Bank (ECB), and IMF—decides to withhold the next tranche of funds. Under this scenario, confidence in Portugal's future within the Eurozone may falter, as it may be seen as the next country in line for an exit. Moreover, we believe that Portugal is unlikely to be able to fund itself in the markets during the second half of this year, as currently envisaged. Therefore, it is likely that Portugal may have to ask for a new bailout from its official lenders. This is likely to happen before the end of this year.