Bank of Portugal Forecasts Deeper GDP Contraction This Year

March 26 (Bloomberg) -- Portugal’s economy will contract more than previously forecast this year as private consumption drops and export growth slows, the country’s central bank said.

Gross domestic product will drop 2.3 percent in 2013, more than the 1.9 percent predicted in January, the Lisbon-based Bank of Portugal said today in its spring economic bulletin. That matches a projection of the Portuguese government. The central bank revised down its 2014 growth forecast to 1.1 percent from 1.3 percent.

“This contraction reflects a sharp decline in domestic demand, against a background of lower permanent income prospects,” the central bank said in a statement. “Exports are projected to decelerate, although maintaining a positive growth, despite the deteriorating outlook for external demand.”

Prime Minister Pedro Passos Coelho is battling rising joblessness and lower demand from European trading partners as he cuts spending and raises taxes to meet the terms of a 78 billion-euro ($100 billion) aid plan from the European Union and the International Monetary Fund. The government on March 15 announced wider deficit targets as the economy struggles to recover.

Budget Deficits

The government targets budget deficits of 5.5 percent of GDP in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015. The economy contracted for a ninth straight quarter in the three months through December as the euro area’s deepening recession weighed on foreign sales.

Export growth will slow to 2.2 percent this year from 3.3 percent in 2012, while imports will drop 2.9 percent in 2013, the central bank said. The trade surplus is forecast to increase to 2.8 percent of GDP in 2013 from 0.1 percent last year, the first surplus in the balance of goods and services in at least 60 years, according to the Bank of Portugal. It predicts a current and capital-account surplus of 3.6 percent of GDP in 2013.

Investment will drop 7.1 percent in 2013 and increase 1.9 percent next year, while private consumption will decline 3.8 percent and 0.4 percent, respectively, according to the projections. Inflation will average 0.7 percent this year and 1 percent in 2014, the Bank of Portugal said.

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net