Portugal’s adjustment programme hits critical juncture, Societe Generale warns

Portugal’s economic adjustment programme is at a critical juncture, French bank Societe Generale has warned today.

In October, following similar moves in Spain and Ireland, the European Council agreed to grant Portugal an additional year, until 2014, to reduce its deficit to within 3% of GDP.

This was conditional on the government undertaking additional consolidation efforts over the next two years to address the earlier overshoot in fiscal outturns.

“But, with fiscal multipliers uncomfortably close to unity, it is hard to see where the projected recovery in 2014 is to come from,” said James Nixon, economist at the bank.

Meanwhile, with the current recession set to enter its third year, inflationary pressures are declining sharply and Societe Generale anticipates the economy will slip into outright deflation towards the end of 2014.

“Weak growth and declining prices will put further pressure on the government’s finances, potentially undermining the planned trajectory to restore market access next year. We see a significant risk that Portugal will have to seek additional assistance next year that could extend to another full-blown three-year programme,” Nixon said.

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