World Economy

Portugal’s Anti-Austerity Drive Brings Some Hope

Portugal’s economy grew at an annual rate of 0.9% in the second quarter.Portugal’s economy grew at an annual rate of 0.9% in the second quarter.

Portugal’s economy is growing only half as quickly as the anti-austerity government had hoped, as its key policy of driving domestic demand comes up short.

The center-left Socialist government, with the support of the Communist Party and radical Left Bloc, lowered some taxes, reversed government worker pay cuts and raised the lowest pensions as it rolled back austerity measures taken after Portugal’s €78 billion ($87 billion) bailout in 2011, AP reported.

The government said after taking power in November that those steps would spur growth.

But the national statistics agency said Wednesday that Portugal’s economy grew at an annual rate of 0.9% in the second quarter—far short of the anti-austerity government’s goal of 1.8% for 2016 and placing the country among the eurozone’s weakest economies.

Prime Minister Antonio Costa said this week that an anti-austerity pact between his mainstream party and the radical left was delivering economic growth and budgetary rigor, ensuring that Lisbon would this year comply with the EU’s fiscal rules for the first time.

At a meeting with foreign journalists on Wednesday, Costa said this year’s budget deficit would fall “comfortably below” 2.5% of gross domestic product—the target set by the European Commission after it withdrew a threat to fine Portugal over its 4.4% deficit last year. The maximum allowed under EU rules is 3%.

After a 2011-2014 EU-led bailout program that had set Portugal’s economic output “back to where we were 30 years ago”, growth was beginning to return, Costa added.

Canada’s DBRS, the only agency to rate Portugal above junk status, has warned that the country’s low growth is putting pressure on this rating, which will be reviewed in October. A downgrade by DBRS would exclude Portugal from the European Central Bank’s bond-buying program, which is crucial for holding down government borrowing costs.

Portugal also runs a “serious” risk of needing a second bailout, if a rating downgrade takes place and sparks a government bond sell-off, Holger Schmieding, chief economist at Berenberg, a German bank, said in a recent note to investors. However, he expected Lisbon to “escape that fate”.

Any suggestion that Portugal would need a second bailout was “utter nonsense”, Costa said.