Via Email (no link available) Barclays Capital offers these comments ...
Portugal: 2nd IMF programme review revises down 2012 growth forecastsThe link Barclays referred to is Statement by the EC, ECB, and IMF on the Second Review Mission to Portugal
The IMF released yesterday a press statement on its second mission review of Portugal (see link at end). Overall, the conclusion is that the "programme is on track" for this year but headwinds will require additional fiscal measures to meet 2012 targets. The 2012 "headwinds" are reflected in IMF's downward revision to its growth forecast from -1.8% to -3% (in line with the EC).
In our view, there are downside risks to this scenario. Meeting the 2012 fiscal target may prove challenging as tax revenue may disappoint on account of weaker growth than expected (BarCap 2012 GDP growth -3.6%.)
The growth outlook
The IMF expects real GDP to contract -3.0% next year, down from -1.8% projected in the WEO and at the programme inception in May 2011 (BarCap: -3.6%). According to the technical mission, weak domestic and external demand will impair the economy. Specifically:
- Private consumption will suffer as fiscal austerity and elevated inflation (reflecting significant indirect tax and tariff increases) take their toll on consumers. Moreover, the ongoing deleveraging by the financial sector is likely to weigh on household consumption and investments, which will further impair real GDP growth prospects.
- External demand: A slowdown in global growth could weaken the contribution to real GDP growth. As the IMF noted, in a context of low competitiveness, "key measures, particularly nominal cuts in public wages and pensions and increases in indirect taxes, are also appropriate in view of the need to switch from a consumption-based to a more export-led growth model".
On the fiscal front, the IMF assessed that implementation of the 2011 budget has proven difficult. In particular, it pointed out that while preliminary data indicate that the end-September ceiling on the cash deficit was met, spending overruns relative to program objectives for the whole year could add up to 1.5% of GDP on an accrual basis. According to the technical mission, these unexpected budget pressures reflect in large part slippages in expenditure controls and insufficient corrective measures.
All of Europe is degrading rapidly. Portugal will not come close to IMF growth estimates. Alternatively, Portugal will not come close to meeting IMF budget goals, most likely both.
Mike "Mish" Shedlock
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