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EURO-ZONE CRISIS

Portuguese economy slumps annual 4.0 percent in the first quarter

Domestic demand shrinks further due to austerity drive and steep fall in investment

The Portuguese economy contracted by more than initially estimated in the first three months of the year as companies cut back sharply on investment spending, while the ongoing austerity drive of the center-right government of Prime Minister Pedro Passos Coelho more than offset a slightly less negative performance by household spending.

The National Statistics Institute (INE) said Wednesday that GDP in the first quarter declined by 0.4 percent on a quarterly basis and shrank 4.0 percent on an annual basis. The INE had initially estimated the quarter-on-quarter contraction at 0.3 percent and the annual fall at 3.9 percent. Output in the fourth quarter was down 1.8 percent on the previous three months and 3.8 percent for the year. The economy has now contracted for the 10th quarter in succession.

The INE said the further deterioration in the economy was due to the negative contribution of domestic demand widening to 6.4 percentage points from 4.6 points in the fourth quarter of 2012. The contribution of net trade – exports minus imports – improved from 0.8 points to 2.3 points due to a sharp contraction in imports. Exports were up an anemic 1.0 percent, while imports declined 6.0 percent.

Household spending contracted by 4.3 percent after declining 5.3 percent at the end of 2012 due to a less negative evolution for the durable goods component of consumption. Government spending contracted an annual 4.0 percent, the same pace as in the previous three months. Gross capital formation slumped by 16.8 percent after falling only 2.1 percent the previous quarter.

The government expects GDP to contract by 2.3 percent, although the Organization for Economic Cooperation and Development predicts a decline of 2.7 percent.

The Passos Coelho government is struggling to rein in the country’s budget deficit to fulfill the commitments it took on in exchange for a 78-billion-euro bailout from the European Union and the IMF. The European Commission has given Portugal until 2015 to meet the EU’s deficit ceiling of three percent of GDP. In order to do so, Brussels said the government needs to implement fiscal measures amounting to 3.5 percent of GDP this year that include cutting its payroll bill and making better use of EU funding.

According to figures also released Wednesday by the EU’s statistics office Eurostat, GDP in the euro zone in the first quarter fell 0.2 percent from the previous three months and was down an annual 1.1 percent, while in the EU the quarterly decline was 0.1 percent and the annual 0.7 percent.