The Portuguese government’s mix of tax increases and spending cuts has put the country on a sustainable economic path, according to a Bloomberg News survey.
No respondent in the poll of 10 economists sees Portugal reverting to large current account and budget deficits, and all of them predict the country’s economic adjustment will persist as the recovery picks up speed.
Portugal, which a year ago emerged from its longest recession in at least 25 years, recorded economic growth of 0.6 percent in the second quarter, the National Statistics Institute in Lisbon said today. That’s ahead of a median economist estimate of 0.5 percent in a separate survey.
Prime Minister Pedro Passos Coelho still has to cut spending to meet budget targets after relying mostly on tax increases last year. Portugal in May exited a three-year bailout program from the European Union and International Monetary Fund without the safety net of a precautionary credit line.
“Portuguese households and firms have learned their lessons from the crisis,” said Jose Brandao de Brito, chief economist at Banco Comercial Portugues SA in Lisbon. “There will be no more credit-fueled booms in the foreseeable future. International markets are also much more sensitive to any meaningful deviation from the adjustment path and will hike funding costs if Portugal gets astray.”
Economists’ confidence in Portugal’s economic path does not seem damped by the first half of the year, which will challenge the country’s otherwise strengthening trade balance. Portugal’s GDP contracted for the first time in a year in the three months through March as exports dropped.
Exports fell 1.9 percent in the first quarter of the year with imports unchanged due to a drop in exports from Portuguese oil company Galp Energia SGPS SA following a planned maintenance halt at its Sines refinery. Galp’s exports accounted for 9 percent of Portugal’s total exports in 2013, according to a company presentation. Galp on July 28 said that first-half exports dropped 36 percent from a year earlier.
Imports are expected to grow 5 percent in the three months through June compared with a year earlier, outstripping export growth of 1.2 percent, according to the median estimate of the economists.
Economists in the survey expect a more favorable trade outlook for the second half of the year, with their median forecast indicating export growth of 2.3 percent in the fourth quarter from a year earlier and beating import growth of 1.7 percent in the same period.
“Although muted activity in the euro zone and a strong euro may have also had a negative impact on external demand, we expect the reversal of these temporary factors to lead to a rebound in exports during the second quarter,” said Diego Iscaro, an economist at IHS in London. “Domestic demand is also expected to continue to stabilize as a result of the gradually improving labor market and rising confidence.”
When asked which will make a greater contribution to GDP growth in 2014, seven out of 12 economists said internal demand will be more important for the economic recovery this year than net exports. Discounting the effects of the one-off Galp export shock, economists still see Portugal’s tradeable sector leading the way to a long-term economic recovery.
“Even though imports have started growing again and will continue to do so as companies invest again, Portugal’s recovered labor cost competitiveness will sustain higher export growth,” said Christian Schulz, a senior economist at Berenberg Bank in London. “The export base is now much higher than before the crisis, meaning the trade surplus and thus the current account surplus will continue to grow.”