Methinks We’re On The Slippery Slope

OK you may be in for a bout of solid over-posting. There seem to be some signs in the air that push may be about to come to shove. Tomorrow I will try and do something on financial architecture and the euro. Meantime this is a ‘light’ warm-up post. The efficient cause is today’s news from Portugal, which suggests that the supposed Harrod-Balassa-Samuelson free-lunch-honeymoon (which has to count as one of the worst pieces of ‘justifying what there is simply because it is’ pieces of quackery where there should have been solid science known to recent history) may be about to come to an end. One of those darned ‘catch up’ economies may have just caught up so hard that’s it’s come to a dead halt. The Bank of Portugal has predicted growth of only 0.75% this year, and even that only if there is the anticipated growth in global demand (which I doubt extremely). Those who have read my Parmalat post will have seen that I am already begining to speculate about whether we are about to see the end of growth in the Italian economy, well just remember Portugal is lined up nicely in the queue to see where lunch is going to be served.

[Update by David: Welcome, visitors from Brad DeLong’s blog! You might want to read Edward’s longer followup post too (as well as the rest of our humble blog.)]

Portugal is set to put recession behind it this year with 0.75 percent growth, however the recovery will be less strong than previously thought, the Bank of Portugal said.

“The weak growth predicted for 2004 owes itself fundamentally to another expected moderate decline in internal demand,” it said in its twice-yearly economic outlook. The bank had estimated in its last outlook issued in June that the Portuguese economy, one of the European Union’s smallest, would grow 1.0 percent this year, after after a contraction of about one percent in 2003.

By comparison, the European Central Bank last month predicted the economy of the entire 12-nation eurozone would grow between 1.1 and 2.1 percent this year. The Portuguese central bank predicted domestic demand would drop between 0.5 and 1.0 percent this year as government spending cuts and low consumer confidence caused by rising unemployment continued to take their toll.

The fall in domestic demand was highlighted on Monday when Portugal’s national association of auto dealers reported sales of new cars had plunged by more than 15 percent in 2003 over the previous year to the lowest level in 14 years. But the fall in domestic demand would be made offset in 2004 by a sharp rise in exports caused by an expected recovery in the global economy, the bank said.

“The upturn in the world economy, and the European economy in particular, were definately confirmed at the end of 2003 and they should go forward this year, which explains the assumptions for growth which were adopted,” it said.

The bank predicted exports would grow between 4.75 and 6.75 percent this year, after rising 3.0 percent last year.

The bank predicted exports would rise further in 2005, between 6.0 and 9.0 percent, helping economic growth to pick up in 2005 to 1.75 percent. Despite the improved economic outlook, Portuguese unemployment, which stood at 6.3 percent of the workforce in the third quarter of 2003, would continue to rise this year before stabilising in 2005, the bank said.

However, inflation would become tamer easing into a range from two to three percent this year from 3.3 percent in 2003. Portugal, a nation of just over 10 million people and one of the European Union’s poorest members, struggled last year through its first recession since 1992. The Paris-based Organisation for Economic Cooperation and Development estimates the Portuguese economy contracted 0.8 percent last year, giving Portugal the worst performance of the OECD’s 30 members

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".