Dark days in Lisbon: Portugal sinks into recession

The Portuguese economy contracted for the second straight quarter, placing the debt-strapped country into another recession as the Lisbon government anxiously seeks to reduce spending and increase taxes.

The country is preparing to receive a 78-billion euro bailout package from the European Union and International Monetary Fund.

Portugal’s prior recession ended in the second quarter of 2009.

GDP shrank by 0.7 percent in the first quarter of 2011 (versus consensus expectation of a 0.3 percent decline), following a revised 0.6 percent drop in the fourth quarter of 2010, according to the National Statistics Institute (NSI) in Lisbon.

The economic contraction “reflects an accentuated negative contribution of internal demand, resulting from a reduction in consumer spending of households and public administration, and to a lesser degree, from a reduction in investment,” the Institute said.

Portugal’s Finance Minister Fernando Teixeira dos Santos said last week that the economy will decline by 2 percent this year, and fall by an equal amount next year.

The European Commission (EC) has similar projections: Portugal’s GDP is expected to drop 2.2 percent this year and by another 1.8 percent in 2012.

The expected further deterioration in labor-market conditions, significant cuts in public-sector wages, a temporary acceleration in consumer prices on the back of a [value-added tax] increase and a limited supply of bank credit for households are expected to weigh heavily on household, the EC warned.

Over the past decade, Portugal has averaged only about 1 percent annual GDP growth, making it one of Europe’s poorest performers.

Meanwhile, the government plans to cut spending in 2012 and 2013 by an amount equal to 3.4 percent of GDP. Other austerity measures on the board include a freeze in the salaries of state workers and reduction in pension payouts.

Lisbon also plans to dispose of its stakes in EDP-Energias de Portugal SA, the country’s largest electricity provider, and REN-Redes Energeticas Nacionais SA, the national power grid operator, by the end of this year.

Teixeira dos Santos has said that the austerity program will allow Portugal to commence an economic recovery by 2013, at which point the jobless rate would peak at 13 percent.

More importantly, Portugal seeks to reduce its budget deficit from 5.9 percent of GDP in 2011 to 4.5 percent in 2012 and to the EU-mandated level of 3 percent in 2013.

In 2010, Portugal’s public debt reached 93 percent of GDP, 68 percent in 2007. The EC expects this debt to swell to 101.7 percent of GDP this year and 107.4 percent in 2012.