MAU MUITO MAU Portugal: Portuguese GDP Plunges in Q4

Parece que todos sabem menos o primeiro ministro....
è com muita tristeza que vejo que o povo è sereno....

Seasonally adjusted figures released by the National Institute of Statistics (INE) show that Portuguese GDP contracted by 1.6% quarter-on-quarter (q/q) during the fourth quarter of 2008. This represents an improvement from the "flash" estimate released in mid-February, which had indicated that GDP had plummeted by 2.1% during the period. GDP had contracted by a revised 0.3% q/q during the first three months of 2008 but actually grew by 0.2% q/q during the second quarter, before then falling again by the same rate during the third quarter of the year. Year-on-year (y/y), Portuguese GDP fell by 1.8% during the fourth quarter, which is the sharpest fall in annual GDP since the third quarter of 2003. Consequently, Portuguese GDP remained unchanged in 2008, following rises of 1.9% in 2007 and 1.4% in 2006. This is the first time that Portuguese GDP has failed to grow since 2003. During the fourth quarter, domestic demand subtracted 1.3 percentage points from overall annual GDP growth, while net external demand made a negative contribution of 0.5 percentage point.

GDP Components Paint Gloomy Picture

The contraction in domestic demand was led by a sharp fall in real investment spending. Specifically, investment plunged by 5.5% q/q during the fourth quarter, following a fall of 1.9% q/q during the third quarter and a rise of 0.5% q/q during the second quarter. Consequently, total real investment fell by 1.1% in 2008, having risen by 3.2% in 2007. Investment is being hit by plummeting domestic and external demand, falling industrial capacity utilisation rates, tight credit conditions, historically low levels of business confidence, and a cooling housing market.
As expected, private consumption waned in the final three months of 2008. Specifically, it fell by 0.6% q/q, following a rise of 1.2% q/q during the third quarter and a fall of 0.2% q/q during the second quarter. In part, this fall was a correction to the sharp increase recorded during the previous quarter, which had been affected by the cut in the value-added tax (VAT) rate in July 2008. However, consumption is also under pressure from a deteriorating labour market, the lack of availability of consumer credit, and increasing concerns about the economic outlook. IHS Global Insight believes that easing inflation, which boosts households' purchasing power, averted a sharper fall during the fourth quarter. The fourth-quarter figures mean that private consumption rose by 1.6% in 2008, unchanged from 2007. Finally, government consumption rose by 0.3% q/q, taking the full-year 2008 increase to 0.5%.
Exports continued to freefall and contracted for the third consecutive quarter. However, the contraction during the fourth quarter of 2008 was much more marked than in previous quarters. Specifically, real exports plummeted by 9.1% q/q, the sharpest fall in exports since at least 1995. This followed contractions of 1.4% q/q and 1.3% q/q during the second and third quarters, respectively. Exports had risen by 2.9% during the first three months of the year. Exports fell by 0.5% in 2008, following an increase of 7.5% in 2007.
Meanwhile, plunging imports actually prevented a sharper contraction in GDP during the fourth quarter. Indeed, imports fell by 8.0% q/q, following a rise of 1.3% q/q in the previous quarter and a fall of 2.4% q/q during the second quarter of 2008. On average, imports still rose by 2.1% in 2008, down from growth of 5.6% in 2007.

Outlook and Implications
Despite the upward revision, Portugal's fourth-quarter figures are disastrous. Worryingly, we foresee further contractions in the coming quarters as the factors that hit the economy during the final three months of 2008 will remain in place at least for the first half of this year. Most of Portugal's trade partners are in deep recessions, which are taking their toll on demand for Portuguese products. However, the economy is being badly hit not only by an extremely challenging external environment, which is weighing down on exports, but also by tight credit conditions, a deteriorating labour market, and increasing concerns about the economic outlook.
Against this backdrop, the government faces a sharp deterioration in its finances, which limits its capacity to use fiscal policy to revive the economy. Indeed, the government implemented a 2.2-billion-euro (US$2.8-billion) stimulus package at the end of 2008, but we believe that this will not be sufficient to prevent a sharp fall in output in 2009. The fiscal deficit is set to balloon during the coming years, and the worrying prospects for the fiscal accounts led ratings agency Standard and Poor's (S&P) to downgrade Portugal's sovereign credit rating in January (see Portugal: 22 January 2009: S&P Downgrades Portugal's Sovereign Credit Ratings).All in all, our March forecast, which has not been published yet, sees Portugal's economy contracting by 3.1% in 2009, although the revision to the fourth-quarter estimate may lead us to alter this figure in our next forecast round.