3rd April 2012
Yesterday saw considerable strength being displayed in many equity markets around the world. If we look at the UK Ftse 100 and the German Dax index both surged by over 100 points. If we look west to the United States we see that the Dow Jones Industrial Average rose 52 points to 12,264 which is the best closing level since December 2007 and this is,according to the Wall Street Journal, after the best first quarter performance (up 8.1%) since 1998. The wider S&P 500 has not performed quite so well but its rally to 1419 was its best closing level since May 2008. So in general equity investors reading this are permitted a smile and in the circumstances perhaps a large one!
Portugal is an exception
Such equity market rallies were once described to me as "climbing a wall of worry" by a colleague so Portugal with all it worries should have surged, right? Er, no. Even yesterday with all the international strength the Portuguese Stock Index 20 or PSI 20 fell by 12 points to 5544. So far this year it has barely risen and compared to a year ago it has fallen by 25%. So quite a different picture indicating that this particular wall of worry has proved too hard to climb.
In fact if we look back to late 2007 we see a PSI 20 which had gone above 13,000 so I think we can safely say that Portugal has a stock market which has not only been in a bear market but shows little sign of emerging from it. Those who feel that stock markets have predictive power will be musing the contradiction between the performance of Portugal's stock market and the rhetoric of Euro zone leaders about what is happening there. They may well be musing the way that Portugal's stock market seems to be following the pattern of the Athens one.
The Bank of Portugal explains part of the problem
The Bank of Portugal is beginning to catch up with economic reality and has told us this in its Spring Bulletin.
"Within this framework, a significant decline in economic activity is projected for 2012 (3.4 per cent), followed by a stabilization in 2013."
It is amazing in official forecasts how these declines are followed by a "stabilization" every time! Sadly reality has yet to be so kind. And if we recall that this follows on from.
"In the context of this process of adjustment of macroeconomic imbalances, Gross Domestic Product (GDP) declined by 1.6 per cent in 2011, as a result of the behavior of all domestic demand components, partially compensated by a robust growth of exports of goods and services."
So if we take 2011 and 2012 together we see that Portugal has had a considerable downward shift in her domestic demand which is expected to not only continue but get worse. Miraculously this is supposed to be counteracted in 2013 by a rise in business investment and this will be.
"favored by external demand developments, which should also imply that exports remain a key contributor to GDP growth."
Much may change between now and 2013 but as we stand in April 2012 the outlook for exporting and exporters in Portugal does not look good.
Public spending will see quite a squeeze
In 2012 Portugal is going to have to apply a considerable public-sector squeeze as it attempts to conform with the Euro zone austerity straight-jacket. If you look at the bare numbers its fiscal deficit improved from 16.95 billion Euros in 2010 to 7.26 billion in 2011 and one might consider this to be a success until one looks further down the Excessive Deficit Report procedure to this.
"This result reflects the transfer of pension funds of the financial institutions of 5993 million euro (3.5% of GDP)."
The problem with one-off ruses like this is next year! And as the target is harder this year Portugal will need quite a severe programme. As she reported a fiscal deficit of 5.1% of her GDP in 2011 we see that the underlying number was 8.6% once we add the pension funds back in. So she will need to reduce it to 4.5% this year meaning that austerity of 4.1% of GDP will be required. We know what sort of crunch this type of move caused in Greece. And even the IMF is being rather cautious with its language.
"provided that downside risks to the economic outlook do not materialize"
What is the latest position?
"In February, Industrial Production year-on-year change rate was -6.8%, down by 1.4 percentage points from the rate observed in the previous month. Manufacturing Industry year-on-year change rate was -2.4% (-0.8% in January)."
If we look at the underlying index we now have a reading of 82 where 2005=100. Portugal's statistics agency raises the number to 86.5 with its calendar and seasonal adjustments.
"The retail trade turnover index (seasonally adjusted and at constant prices) registered a year-on-year change rate of -8.9% in February (-7.8% in January)."
If my attempt to translate Portuguese is working correctly the real level of Portuguese retail sales is 75 where 2005=100. It is quite a seasonal series but if we look at the last two Februaries we see 83 in 2011 and 86.2 in 2010.
So we can safely conclude that domestic demand in Portugal's economy is on a downward trajectory. We can also see that there is going to be no boost from workers in Portugal's retail industry.
"The indices of employment, of the number of hours worked adjusted for working days and of wages and salaries attained year-on-year change rates of -5.5%, -6.2% and -3.7%, respectively."
How exactly are these people going to pay the higher taxes required? Also those losing their jobs will be another problem for the fiscal deficit target. Only yesterday Eurostat reported that the Portuguese seasonally adjusted unemployment rate rose from 14.8% to 15% in February.
Exports will come to the rescue?
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