Has Portugal escaped its economic depression or not?

by Shaun Richards

We have an opportunity today to look at the Euro area from two different but linked perspectives. The first continues from yesterday’s money supply analysis which tells us that the weaker economic phase looks set to continue overall. The next is that whilst I have pointed out in the past that in terms of economic growth in the Euro area Italy and Portugal have been like twins with it struggling to get above 1% per annum on any sustained basis Portugal has been doing better than that in recent times. Another difference is that whilst Italy has been in the bad boys/girls club Portugal is pretty much a model Euro area nation in terms of doing what it is told.

Looking back

The credit crunch hit Portugal with the annual fall in GDP peaking at 4.3%, however the economy bounced back quickly until the Euro area crisis hit. It was the latter which drove the “lost decade” and indeed depression seen in Portugal as annual GDP growth went negative again at the opening of 2011 and remained there until the last quarter of 2013. Not only that but the last three-quarters of 2012 all saw annual rate of fall in GDP exceeding 4%.

That means that the subsequent recovery had to dig its way out of quite a hole especially as it started slowly. Things picked up late in 2016 and 2017 was strong meaning as I pointed out on the 19th of November last year.

As to a full perspective the previous peak of 45.76 billion Euros for GDP was finally passed in the second quarter with its 45.88 billion.

The catch to the recent good news is that the annual rate of economic growth has been fading from the peak of 3.1% seen in the first half of 2017 with the latest numbers below.

The Portuguese Gross Domestic Product (GDP) increased by 1.7% in volume, in the fourth quarter of 2018 (2.1% in the previous quarter…..In comparison with the third quarter of 2018, GDP increased by 0.4% in real terms (0.3% in the previous quarter)

So if we take the second half of the year with ~0.7% GDP growth we can expect a further slowing. So was it to use the words of ECB President Mario Draghi all QE driven?

What changed?

If you look at the past history of Portugal which is littered with interventions by the IMF the issue has been one of balance of payments deficits. This was what the internal competitiveness model ( lower wages) was supposed to improve and there is evidence that it had some success.

The recovery period subsequent to 2013 was characterised by the continued increase in the weight of exports in GDP , a trend that extends to all components, with emphasis on tourism, which presented the greatest cumulative growth. ( Bank of Portugal)

The problem looking ahead is again illustrated by the Bank of Portugal.

chiefly due to a downward revision of export growth. This reflects a revision of the assumptions relating to developments in external demand and the incorporation of the most recent information.

This was added to in the latest national accounts.

Net external demand presented a more negative contribution to year-on-year GDP rate of change, reflecting a reduction in volume exports of goods.

In case you are wondering why this is such a big deal it is driven by this. From the Bank of Portugal a week ago.

The net external debt of Portugal, which is the result of the IIP mostly excluding capital instruments, gold bullion and financial derivatives, reached €179.5 billion in December 2018. Net external debt as a percentage of GDP declined by 2.2 percentage points from the end of 2017 to the end of 2018. Net external debt went from 91.7% to 89.5% during this period, as a result of an increase in GDP that more than offset the nominal increase in debt.

I cancel caution about the accuracy of all this but the principle of a large external debt holds. The issue with accuracy is shown below as  whilst a currency fall is a fact the holdings detailed are an estimate which is unlikely to be that accurate.

In the case of exchange rate changes, a depreciation of the kwanza resulted in a reduction in the value in euro of Angolan assets held by residents.

Returning to possible consequences one have been removed by Euro area membership as a currency collapse could happen but is a long way away if we note the current account surplus driven by Germany. Instead in the Euro area crisis we saw the benchmark ten-year bond yield rise into the high teens. That is a long way away now as the combination of a better economic growth phase and ECB QE means the ten-year yield is a mere 1.47%. Crazy really, but then so many bond yields are these days.

The undercut is that the whole position would likely be much better if Portugal had an external competitiveness measure or its own exchange rate as a new Escudo would be much lower than the Euro.

Car Production

This has been an area driving Portugal’s growth as highlighted by this earlier this month from The Portugal News.

Automotive production in Portugal increased by 68% in 2018 compared to the previous year, to a total of 294,000 vehicles, accentuating the upward trend started in 2017, the Automobile Association of Portugal (ACAP) announced today.

We know, however, that the world automotive market has slowed down and this has especially affected countries which export cars like Portugal. There have been individual changes but no great detail on the overall picture. All we have are the hints from this.

Industrial Production year-on-year change rate was -0.3%, in December (-3.1% in the previous month). Manufacturing
Industry year-on-year change rate was -0.6% (-5.2% in November).

House Prices

This has been “Boom!Boom!Boom!” to quote the black-eyed peas. From the Portugal resident.

There are signs that this may be particularly true of the Portugal real estate market, which, taking its cue from activity in Lisbon, is increasingly an investment of choice for international property investors and property development companies who are looking to take advantage of some of the best returns available in Europe.

If we switch from the hype to the numbers we are told this.

The Confidencial Imobiliário Residential Price Index reports that the cost of Portuguese property was up 15.6% in September 2018 when compared to the same period the previous year. Furthermore, it also reported year-on-year increases of over 10% for every month since July 2017.

I have pointed out before that the Golden Visa system has led to celebrities such as Madonna coming to Lisbon which will create some economic activity. But the Portuguese first-time buyer faces quite a bit of inflation.

Comment

There has been plenty of good news in the past couple of years from the Portuguese economy and let me add another dose just released by Portugal Statistics.

In December 2018, the unemployment rate was 6.6%, down 0.1 percentage points (pp) from the previous month’s level, the same value as in three months before, and down 1.3 pp from the same month of 2017.

Except it came with a troubling kicker which is in line with more recent events.

The provisional unemployment rate estimate for January 2019 was 6.7%, up 0.1 p.p. from the previous month’s level.

We do not yet know whether the last couple of years will be seen by historians as a turn for the better as we hope or just another phase in a long running depression as we fear. If the latter the pumping of house prices will look like something out of a dystopian science-fiction piece where the already wealthy gain but future buyers lose heavily.

Also if we look what the Doobie Brothers called a “long train running” there is this.

In 2018, there were 87,325 live births registered and 113,477 deaths in the national territory……….This resulted in the deterioration of the natural balance (-25,982), which remains negative for the tenth consecutive year.

Another lost decade?

 

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