–Adds Additional Forecast, Comments From Bank of Portugal

PARIS (MNI) – The extra budget cutting and private sector
deleveraging needed to put the Portuguese economy back on a sustainable
long-term path will cause a sharp drop in economic activity and
employment over the medium term, the Bank of Portugal said in its Summer
Economic Bulletin, published early Tuesday morning.

The central bank sharply downgraded its forecasts for GDP growth,
private consumption and business investment, compared with previous
forecasts published in the spring. The new austerity measures required
to secure a E78 billion bailout package in May from its European
partners and the International Monetary Fund are largely to blame for
the darkening picture, the bank suggested.

“The need to reinforce the consolidation of public finances, as
well as a gradual deleveraging of the private sector, including the
financial system, is essential to ensure balanced and sustainable
long-term development,” the bank wrote. However, “the correction of
macroeconomic imbalances will continue to imply across the forecast
horizon (ie, 2011-2012) a significant contraction of internal demand,
with an impact on the level of economic activity and employment.”

The central bank forecast a GDP contraction of 2.0% this year,
representing a considerable deterioration in the outlook compared with
the -1.4% it had projected in the spring. For 2012, the Bank of Portugal
sees the recession loosening its grip only slightly, with GDP shrinking
1.8%. This compares with a previous forecast of +0.3%, showing how much
worse things are looking now than a few short months ago.

Private consumption is expected to tumble by 3.8% this year, double
the decline that was expected in the spring. For 2012, private
consumption should drop by 2.9%, nearly triple the 1.0% drop that was
forecast in the spring.

Business investment will take the hardest hit, according to the
Bank of Portugal forecasts, falling 10.8% in 2011 and 10.0% next year.
That is a sharp deterioration from the -5.6% and -1.3%, respectively,
expected in the spring.

The one bright spot is exports, expected to expand by 7.7% this
year on strong demand from abroad — an improvement on the +6.0%
forecast in the spring. For next year, export growth is seen
decelerating to 6.6%, little changed from the previous forecast of
+6.5%.

The Bank of Portugal said that deleveraging in the banking sector,
while necessary, would be “an additional limiting factor” on spending,
particularly for durable goods and private investment.

On the inflation front, the Bank of Portugal noted that in the
short term, measures taken to reduce the deficit would increase the HICP
index. It is forecasting HICP inflation of 3.4% this year, due largely
to increases in VAT taxes in mid-2010 and earlier this year, and a “very
significant increase” in the price of some regulated goods and services.

The bank noted that its forecasts were subjected to “particularly
elevated uncertainty,” including the possibility of adverse developments
in the global economy and a resurgence of the sovereign debt crisis in
Europe. However, the risks to the growth outlook for 2011 and 2012 are
“essentially balanced,” it said.

–Paris Newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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