Economic Outlook No.1189-1190

Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook

Euler Hermes

Portugal

Towards a third year of recession

Overview The Portuguese economy looks set to record a third year of recession in 2013 (-1.7%), before recovering slightly in 2014 (+0.8%). Domestic demand is expected to continue to fall, although at a more moderate pace: -3.6% and -0.3% in 2013 and 2014, respectively. Household consumption and public spending are forecast to fall during the coming two years, each under the effect of austerity. Investment should reach a low in H1 2013, before gradually picking up again in q/q terms, spurred on by a better outlook for exports. Foreign trade will remain the only variable contributing positively to growth, playing the role of a cushion in 2013 (+1.9% contribution) and driver in 2014 (+1.1% contribution).

Insolvencies in number of cases

1,000 2,000 3,000 4,000 5,000 6,000 7,000

0 9 9 9 9 9 0 0 0 0 0 1 1319753197531

Sources: Instituto Informador Comercial, D&B, Euler Hermes forecasts

The government will stay the course of austerity. Budgetary targets have been revised downwards, from -3.0% to -4.5% of GDP in 2012 and from -4.5% to -5.0% in 2013, with a return to -3.0% in 2014 in agreement with the Troika, given the sharper-than-expected deterioration in the economic environment. Significant progress has been made in terms of structural reforms, through an improvement in business environ- ment, liberalization of the labor mar- ket and a gradual reorientation of the production structure with a focus on more buoyant sectors. In the short- term, these reforms, combined with the austerity measures in the 2013 budget (widespread hike in taxes, cuts in unemployment benefits), are likely to continue to weigh on growth, hin- dering any recovery in domestic demand.

Household spending is unlikely to recover before H2 2014. Fundamentals continue to worsen, in particular the unemployment rate and incomes, pre- venting any upturn in consumption in the short term. Private consumption will continue to decline throughout 2013 (-2%). A slight recovery should take place in quarter-on-quarter terms starting 2014, as the structural reforms would begin to bear fruit (improve-

ment in competitiveness, upturn in investment) and export markets are set to improve.

Business investment is expected to remain fragile. Investment has been the component the worst hit by the cri- sis: in late 2012, it is nearly 30% below its pre-crisis peak. It is likely to con- tinue to decline in 2013, owing to downbeat demand prospects, in par- ticular in H1 2013 . The trend should gradually start to reverse from H2 2013, in line with better export performances and a business climate increasingly favorable for investment. Insolvencies are projected to decrease by -10% in 2013 after +43% in 2012.

Foreign trade performance will improve. Mirroring the sharp contrac- tion in investment, Portuguese imports have fallen markedly (down 20% from the pre-crisis peak), generating an automatic positive contribution by for- eign trade to growth. Exports, on the other hand, have held up well and have returned to their pre-crisis levels. The determinants are also pointing in the right direction, thanks to gains in pro- ductivity, competitiveness and a reori- entation of the production structure towards more export-efficient sectors._MI

Insolvencies by sector 2011 Number*

Agriculture Food

Transport

Construction Textiles

Cars and C. equipements Industry Retailing Services Others Total

* Jan-Dec '10 to Jan-Dec '11 Source: Euler Hermes

109 279 188

1,295 405 180 679 749 749 113

4,746 Share

of total 2.3%

5.9% 4.0%

27.3% 8.5% 3.8%

14.3% 15.8% 15.8% 2.4%

100%

Note pays structurelle

Country Risk Level AASENSITIVE

H CRI

FFI 3

Economic forecasts

Change over the period, unless otherwise indicated: * contribution to GDP growth ** EUR bn

PORTUGAL GDP

Consumer Spending Public Spending Investment Stocks Exports Imports

Net exports Current account

Unemployment rate Wages

Inflation General gov. balance ** ** forecasts

share 2011 2012 2013 2014 100% -1.7 -3.0 -1.7 65% -4.0 21% -3.8

-5.4 -2.0 -3.2 -2.5

* * **

Current account (% of GDP) Employment

18% -11.3 -13.8 -5.6 -1% -0.5 35%

7.5

39% -5.3 -4%

4.5 -11 -6.5 -2.8

-0.5 -0.6 4.3

1.3

-6.6 -3.8 4.0 -4

1.9 -2

-2.3 -1.5 -3.7 -0.9

12.9 15.6 16.2 -1.2 3.6 -7

-4.7 -2.0 2.7 -8

General gov. balance (% of GDP) -4.2 Public debt (% of GDP) Nominal GDP

108 171

0.8 -8

-5.0 -4.7 125 134 166 164

Sources: IHS Global Insight, Euler Hermes forecasts 35

0.8 -0.8 -1.0 2.8 0.0 2.3

-0.5 1.1 -2

-1.0 0.8

15.8 -0.7 1.3 -5

-3.0 136 167

1,039 1,201 1,395 1,558

1,703

1,929 2,412 2,605

1,646 2,001

1,690 2,907 3,815 3,977 4,746 6,800 6,100

1,267

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