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Bank of Portugal Forecasts Economy Will Shrink a Third Year

Portugal’s economy will contract for a third year in 2013 as the government raises taxes and investment drops, the country’s central bank said.

Gross domestic product will shrink 1.6 percent after declining an estimated 3 percent in 2012, the Lisbon-based Bank of Portugal said today in its autumn economic bulletin. In July, the bank forecast no growth for 2013.

“The sharp contraction in internal demand will only be partially compensated by the positive performance of net external demand,” the central bank said in a statement.

Prime Minister Pedro Passos Coelho is battling rising joblessness and a deepening recession as he cuts spending and raises taxes to meet the terms of a 78 billion-euro ($99 billion) aid plan from the European Union and the International Monetary Fund. Portugal has already been given more time to narrow its budget shortfall after tax revenue missed forecasts.

“Managing the Portuguese economy’s adjustment process places important political challenges,” the Bank of Portugal said. “An eventual moderation of the intensity of the adjustment effort, namely at the level of the budget, is conditioned by the guarantee of financing conditions for the Portuguese economy and implies a greater accumulation of debt, worsening the conditions of its sustainability.”

The bank forecasts investment will drop 14.9 percent in 2012 and 10 percent next year, while private consumption will decline 5.8 percent and 3.6 percent, respectively. It projects inflation of 2.8 percent for this year and 0.9 percent in 2013.

Exports will grow 6.3 percent in 2012 and 5 percent in 2013. Portugal’s current- and capital-account deficit will narrow to 0.2 percent of GDP in 2012 and it will post a surplus of 4 percent in 2013, according to the Bank of Portugal.

Portugal’s economic growth has averaged less than 1 percent a year for the past decade, placing it among Europe’s weakest performers. The government projects GDP will shrink 1 percent in 2013 after contracting 3 percent this year. The unemployment rate will rise to 16.4 percent in 2013 from 15.5 percent this year.

The government aims to reduce its deficit to 5 percent of GDP in 2012 instead of the previous goal of 4.5 percent, Finance Minister Vitor Gaspar said on Sept. 11 after EU and IMF officials agreed on the new targets. It aims for a deficit of 4.5 percent in 2013 and will only cut the shortfall below the EU’s 3 percent limit in 2014, when it targets a 2.5 percent gap.

The country’s debt will peak at 124 percent of GDP in 2014, higher than a July forecast for debt to peak at 118 percent in 2013, the IMF said in a report released on Oct. 25. The increase in the projection is due to the slower pace of fiscal adjustment, the recession extending into 2013, and “more conservative” projections for privatization revenue, the IMF said.

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